The Science Behind The Markets: Masters in Business with David Booth

Barry speaks with David Booth, founder and chairman at Dimensional Fund Advisors and author of Stay Calm. They discuss his time at the University of Chicago Booth School of Business where he was the research assistant to American economist and Nobel Laureate Eugene Fama, before leaving to start Dimensional Fund Advisors. They discuss embracing the uncertainty of the markets and the importance of staying the course. David also discusses his philanthropic history and giving back to the places that shaped him. See omnystudio.com/listener https://omnystudio.com/listener for privacy information.

Speaker names marked ? are inferred from speaking time and the show’s known hosts — they are not voice-verified.

• 0:00Speaker 00

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• 1:53Barry Ritholtz?

  This week on the podcast, what can I say? Legendary investor and founder of Dimensional Funds, David Booth, talks about his entire career, his philosophy, philanthropy, how he helped build DFA to a trillion-dollar fund, and why people refuse to just manage what they can and stay calm in the face of volatility and market events. I thought the conversation and the book Stay Calm was fascinating, and I think you will also.

• 2:37Barry Ritholtz?

  David Booth, welcome back to Bloomberg.

• 2:39Speaker 05

  Well, thanks for having me. Always a pleasure.

• 2:41Barry Ritholtz?

  I was going to say the same. It's always a pleasure. I know your background, but I'm going to assume a lot of listeners may not be familiar with it. So I want to start with, go all the way back to your college and grad school education. You get a bachelor's in economics from the University of Kansas, then you get a master's degree focused in business, and then you go to the University of Chicago for a PhD. That very much sounds like academia was the future.

• 3:12Speaker 05

  Well, it really was. I mean, in the sense that, like a lot of kids, when you're in college or even high school, you think, boy, I'd like to be a professor, because that's all you know, right?

• 3:23Barry Ritholtz?

  Right. And it's a great job. You're on a campus, it looks like fun.

• 3:28Speaker 05

  Yeah, back in those days, it was, you know, it was a good, it was a good professionally. I mean, there is a thrill of teaching kids, seeing the light go on, kind of the same thing we have in business. You know, when you have a client, finally, they

• 3:45Barry Ritholtz?

  When they get it.

• 3:46Speaker 05

  When they get it, you know, it's very cool.

• 3:48Barry Ritholtz?

  So at Chicago, you pivot from a PhD to an MBA, and eventually you become some young professor who was not that much older than you, Gene Fama's assistant researcher, TA. Tell us a little bit about what led to that pivot.

• 4:04Speaker 05

  Well, I mean, the backdrop is, in that period of time, the late 60s, early 70s, that's where science really emerged, or finance emerged as a science, and has continued to evolve, you know, even today. And by that, I mean, for something to be a science, you need testable hypotheses. Don't worry, I'm not getting too heavy into this. The, and before 1960, they just didn't have the data to test things out. So, and the early 60s, the University of Chicago developed this research-quality database.

• 4:43Barry Ritholtz?

  CRISPR.

• 4:44Speaker 05

  CRISPR. It started in 1926. So now we have, they've updated it, so now we have over 100 years of data.

• 4:51Barry Ritholtz?

  When did Chicago first roll that out?

• 4:53Speaker 05

  About 63. Well, Fama, my mentor, and Nobel laureate in 2013, the, he was in the PhD program. And Chicago, Jim Lorie and Larry Fisher developed this database, and they turned it over to Gene and said, look, do some paper, do something with this data. And so he, he started, he had a head start on everybody, which is, and for the next 20 years, he was the most cited, you know, academic.

• 5:24Barry Ritholtz?

  Still one of the most cited academics.

• 5:26Speaker 05

  Maybe the most ever, really, in finance.

• 5:29Barry Ritholtz?

  First mover advantage, for sure. So around the time you finish your PhD, Fama's Efficient Market Hypothesis, that thesis was starting to gain traction, at least in academia, if not yet on Wall Street. Tell us a little bit about what was so attractive about EMH.

• 5:51Speaker 05

  Well, it was incredibly exciting. First, let me just make a slight correction. I actually didn't get a PhD.

• 5:57Barry Ritholtz?

  Right, you got a DM, you worked on your PhD and then got an MBA.

• 6:01Speaker 05

  Yeah. And eventually I decided the world would be better served if Gene Fama did research, and I tried to apply the ideas rather than the other way around. So I walked into his office one day and said, look, I think I'd like to leave the program. So he calls up Mac McQuown out at Wells Fargo in San Francisco. Mac was in charge of applying quantitative methods for the bank, and one of the areas he worked on was investing. So he calls up Mac, Mac had always wanted one of his students, so he recommended me. And Mac and I hit it off, and he invited me to go work for them, so I decided to leave the program.

• 6:43Barry Ritholtz?

  So the first job, did you ever get your MBA, by the way?

• 6:46Speaker 05

  I got the MBA. On the way out, they gave me an MBA.

• 6:48Barry Ritholtz?

  That was nice. That was a good investment on their part. You worked for Mac at Wells Fargo in San Francisco.

• 6:56Speaker 05

  In San Francisco.

• 6:57Barry Ritholtz?

  I didn't realize you were on the West Coast for a while.

• 6:59Speaker 05

  Yeah, right. It, I mean, this is the early 70s, so it was still kind of hate Ashbury kind of thing, you know, for

• 7:07Barry Ritholtz?

  For sure. So Mac is the guy who's often credited with creating the first version of an index fund. I think, if memory serves, it was for an institutional client's pension or something like that?

• 7:20Speaker 05

  Yeah, right, it was Samsonite.

• 7:21Barry Ritholtz?

  Samsonite, that's right.

• 7:22Speaker 05

  And

• 7:23Barry Ritholtz?

  Walk us through that. What was it like?

• 7:26Speaker 05

  It was, it turns out, it was really pivotal, pivotal in kind of the history of finance for a couple of reasons. One is, in doing all this research in finance, you know, the fundamental question became, you know, if you can't outguess the market, how are you supposed to invest? I mean, most people growing up thinking, and back in those days, everybody thought that investing was about trying to pick the next winner's stock and time markets and that sort of thing. And beginning in the mid 60s, all of a sudden, with this burst of data, they could examine

• 8:08Speaker 05

  things like, are professional managers that try to outguess the market, are they worth the cost? You know, and they've been doing this research for years, and there's no compelling evidence that they're worth the cost. In fact, I think the most practical assumption for all your readers is, you know, the professional investors don't seem to be able to beat the market, okay? And that has a profound implication. And in fact, we can get around more to the personal story. My parents grew up in the Great Depression, and then fought World War II and so forth, and never had much money, and, but they never invested in public markets, because they

• 8:52Speaker 05

  thought of themselves as outsiders, as the insiders would make all the money and just take advantage of them. So they never, they never invested, and they had a little tougher time in retirement than they probably should have.

• 9:04Barry Ritholtz?

  And to be fair, the history before the post-World War II era was, they weren't so wrong.

• 9:11Speaker 05

  Right, they weren't so wrong. So now, that's the breakthrough. One of the implications of the new science is that the outsiders can do as well as the insiders. It may be better, once fees are considered, because you can buy market portfolios very easily and very inexpensively now, and the pros don't seem to be able to beat that.

• 9:31Barry Ritholtz?

  Well, the data on the pros, it doesn't matter if you're looking at Morningstar, or Spiver, or Dalbar, or any of the annual studies, is in any given year, less than half of professionals beat the index, and I think that's net of fees.

• 9:47Speaker 05

  In fact, yesterday, sorry, but it was, there was a front-page article in Wall Street Journal, right? Only 27% last year, in the last 12 months.

• 9:57Barry Ritholtz?

  It was a particularly bad year, because one sector dominated, and if you didn't have exposure to that sector, you badly lagged. And the year before, the sector didn't dominate. So you had to pick the sector, time it right, and stay invested.

• 10:11Speaker 05

  Of course, if you do all of that, you don't need our help.

• 10:13Barry Ritholtz?

  That's exactly right. So Mac creates the first index fund. I'm really curious, or one of the first, I'm curious, was there much of a reaction or any pushback from Wall Street, or did it just kind of slip by unnoticed?

• 10:28Speaker 05

  No, there was a huge pushback. There was stuff they didn't want to hear. I mean, they've been claiming for years, oh yeah, we can beat the market, we can, we can do 15 or 20% regardless of markets. Oh, you have all these claims. It turned out, you know, unfortunately, couldn't be backed up by the data.

• 10:47Speaker 05

  You know, that's a very powerful lesson in developing arguments. I mean, if you have data and the other side doesn't, you know, it's kind of

• 10:55Barry Ritholtz?

  Unfair fight.

• 10:56Speaker 05

  Unfair fight. So, but it gets into a lot of issues we'll cover as to why I'm still out trying to deliver that message. It's so hard to believe.

• 11:06Barry Ritholtz?

  So, so let's talk a little bit about that message. You and some of your Chicago classmates, Rex Sinkfeld is one, and he had worked on an S and P 500 index fund

• 11:18Speaker 05

  Right.

• 11:19Barry Ritholtz?

  At American National Bank. And then Larry Klotz was also a Chicago

• 11:24Speaker 05

  No, he was just, we worked together for A.G. Becker.

• 11:27Barry Ritholtz?

  Uh huh. And that was also in Chicago, but not the university.

• 11:31Speaker 05

  Yeah, right, right, right.

• 11:32Barry Ritholtz?

  And then Mac basically helped fund this, hey, we want to apply everything we learned at Chicago and express the insights of Fama in an investable thesis.

• 11:45Speaker 05

  Right. And interesting thing there was that there were really two avenues that were being explored simultaneously. We had one group that I worked in, and we used as our primary outside consultants Fisher Black and Myron Scholes.

• 11:59Barry Ritholtz?

  More Nobel laureates.

• 12:01Speaker 05

  Two more, yeah. What turns out, in working on our project, they developed the Black Scholes Option Pricing Model, which Myron became a Nobel Laureate. Fisher unfortunately had passed away, so he didn't get it. But the idea of our group was, can we, okay, we accept Michael Jensen and the work of others, says that the pros can't seem to beat the market. So what are you supposed to do? So by then, we'd developed, you know, quite a bit of the science. And, and one idea, based on the models at the time, sounds silly now, but was, well, if you have a portfolio that has a higher beta than the market, it should outperform. Okay, so

• 12:44Barry Ritholtz?

  But does that mean you're just taking on more risk?

• 12:46Speaker 05

  You're just taking on more risk. Yeah, but, you know, on a risk, and so that's one way to beat the market is take more risk.

• 12:54Barry Ritholtz?

  Mm hmm.

• 12:54Speaker 05

  But still being diversified. So that was the Samsonite account. They figured out a way of creating a higher beta portfolio. Basically, they would start out with equal positions in all the stocks they bought, equal dollar amounts. And, you know, a portfolio like that should have a somewhat higher beta. Let me just refresh people's memory. The market has a beta of one. So if you fluctuate more than the market, you have a beta greater than one. And fluctuate less than the market, your beta is less than one. And so if you have a higher beta, you should outperform. That was the thinking. Incredibly naive. And

• 13:37Speaker 05

  we, we were kind of geeky back then. So I think

• 13:40Barry Ritholtz?

  I think you guys are still a little geeky.

• 13:42Speaker 05

  Yeah, still good. Well, yeah, that's, I've learned to kind of appreciate that, actually. So that was, that was one of the group. The other group at Wells was the trust department. And Mac hired somebody to head up the trust investments. And he was to do an S and P 500 index fund. Okay, so that was the

• 14:06Barry Ritholtz?

  Still early 70s?

• 14:08Speaker 05

  Yeah, still, this is, you know,

• 14:09Barry Ritholtz?

  So this is decades before BlackRock, years before Vanguard. This is very, very early.

• 14:14Speaker 05

  Right. So that's what they wanted to do. And we go, look, as a scientist, you wouldn't do an index fund. They go, but I think it was some marketing genius came in and said, no, you want an S and P 500 index fund. Everybody can understand that. You can track the index. And here again, the pros don't seem to be able to beat that, that index. So why don't you can at least can get the index return. So

• 14:39Barry Ritholtz?

  Can't get alpha if you're not at least getting beta, right?

• 14:41Speaker 05

  Yeah, right. So that now, so those are two different points. And the reason I emphasize that is that S and P 500 index fund idea took off, and it changed hand, that group left and changed hands a couple of times. And now that's the cornerstone of BlackRock.

• 14:59Barry Ritholtz?

  It worked its way eventually to Barclays, and then BlackRock bought that whole business in, what are they, 14, 15 trillion?

• 15:07Speaker 05

  Yeah, right. No, I mean, it's phenomenal success. So I'm not arguing.

• 15:11Barry Ritholtz?

  And they, they basically proved the point, hey, it's really hard to beat the market.

• 15:16Speaker 05

  It's hard to beat the market, yeah. So hats off to them. Now, keep in mind, so let's go back to the other group, the one that I was working on. That really became the basis for Dimensional. So eventually, our group, we ended up irritating the trust department enough, they got rid of us. So

• 15:32Barry Ritholtz?

  So this was you, Rex?

• 15:34Speaker 05

  No, Rex wasn't there at the time.

• 15:36Barry Ritholtz?

  He wasn't. So who was the initial group?

• 15:38Speaker 05

  Well, Rex was part of the initial group of Dimensional, sorry. And we, and we brought in, to help us out, one of the first, the first two people we talked to were Gene Fama, my mentor in the research side, and Mac McQuown. By that time, it left Wells as well. So that's how we, then we pulled together the, the other leading academics we worked with, you know, people like Merton Miller, who's, you know, 1990 Nobel Laureate, and Myron Scholes in 97, along with Fama.

• 16:13Barry Ritholtz?

  So out of all of this, your first fund that you launched when DFA began in Brooklyn was a small cap or a micro cap strategy?

• 16:22Speaker 05

  Yeah, right. We were the first people to use small cap as a term, meaning a smaller

• 16:26Barry Ritholtz?

  And this was based on Fama's, some of the initial factors, small seemed to have persistent performance attributes.

• 16:35Speaker 05

  Yeah, that was documented about 10 years later. So here we are, we're in some ways flying blind. We had a, we had a compelling argument. Because in 1981, if you looked at large institutional investors, they weren't holding the stocks of smaller companies in a meaningful way. So if you want to be diversified, you want large and small, not just large.

• 16:56Barry Ritholtz?

  So was that the pitch to institutions?

• 16:59Speaker 05

  Yeah.

• 16:59Barry Ritholtz?

  Small cap will diversify off the rest of your, against the rest of your holdings.

• 17:03Speaker 05

  Right. And then, and talking to Fama, he said, you know, we had, and so we got our first clients with that. So we, often running with a small cap fund, we had clients. And Fama goes, well, you know, we have a student here that did his PhD dissertation on just what you're looking at, I think. He goes, Ralph Bonds. And Ralph had done a study, looking, breaking down stocks on the New York Stock Exchange into size quintiles, largest to smallest. And the smallest stocks, smallest quintile, outperformed all the others by quite a bit over time. So putting my marketing hat on, go, I think we'll define small to be the smallest quintile of companies on New York. And Mama didn't raise a complete

• 17:45Speaker 05

  idiot here, you know. So that was, that was how we got started. And there really wasn't a counter argument. Because people couldn't say, oh, no, I've got that covered. They knew they didn't have a small cap covered. So what we were able to do is provide access, which is to small companies. And that's really the basis of Dimensional. Something that's really, and about 10 years later, Fama along with his colleague Ken French, felt, you know, developed this multi-factor model. So we, when we, back when I was at Wells, we just had the single factor, beta. So we had a couple more factors. That's getting

• 18:25Barry Ritholtz?

  So Fama, French started with three, then it was five, and arguably, there are just hundreds, most of which are tiny.

• 18:32Speaker 05

  Yeah, yeah, most of which are tiny. And it kind of collapsed, you know,

• 18:37Barry Ritholtz?

  Five to seven is plenty.

• 18:39Speaker 05

  Well, three's plenty, I think. Four, we have really four, five now. But, you know, you get your big bang out of the first one, in the market.

• 18:47Barry Ritholtz?

  The beta.

• 18:47Speaker 05

  The beta. And the second factor, say, value versus growth, that picks up a lot, not as much as the first. And then you get into small, is that small? That adds a little. Then you can add, pretty soon, there's diminishing marginal utility, like everything in life.

• 19:05Barry Ritholtz?

  Quality, momentum. As you work your way down, each generates less and less of a bang. But what's so fascinating to me is, nobody had taken the approach that, hey, there is plenty of quantitative data to back this up. Here is a testable thesis, a falsifiable thesis, and we can express these ideas in a portfolio. That, to me, was what set the launch of Dimensional apart from everybody else. Am I stating that correctly?

• 19:36Speaker 05

  You got it. That's it. And it shows you how powerful an idea was. Because here we are, starting a firm, we have no track record. I'm the first portfolio manager. I'd never managed stocks, or even bought stocks before. And we're operating out of my spare bedroom in downtown Brooklyn Heights, you know. So you figure

• 19:59Speaker 05

  How can you pull that off? Well, you can pull it off if your idea is as profound as the idea. The idea itself is so profound and backed up with incredible research. You know, that's, that's hard to refute.

• 20:13Barry Ritholtz?

  So, so here's the key question. Given how powerful that is, but at the time fairly novel. What do you think Wall Street just missed about indexing investing? Because clearly there's a financial opportunity. Whether or not your particular fund at the moment is selling performance and active selection. No one else looked at this and said, hey, there, there's a business to be had here.

• 20:42Speaker 05

  Well, back in those days, unfortunately, this is changing now, but back in those days, basically nearly all financial services were distributed through commissioned salesmen. So Wall Street, basically, if you have a commissioned broker managing your money, I don't know what you're going to do, but you're going to be trading a lot, I can assure you. You know, and if there's anything that all this research pointed to is you don't want to trade a lot, you know, trading is a negative expected outcome. Kind of like gambling in Vegas. So, but that's, that's the cornerstone of, of Wall Street. So you go, what do you mean? You're telling me I shouldn't be trading a lot? You're, you're ripping my eyes out. I mean, this is, that can't be true.

• 21:26Speaker 05

  And you go, hey, look, all we, all I can tell you is we have logic, reason and empirical evidence on our side. You have no data. All you have is bluster on your side, you know? And over the long haul, we're winning. But it's taken 50 years, you know?

• 21:40Barry Ritholtz?

  Hard to make somebody understand something when their income is depending on them not understanding it, to paraphrase.

• 21:48Speaker 05

  Right. And if you don't have data to support it, then all you're doing is bluster. And look, Wall Street firms in those days were very good at shoving product down people's throats.

• 21:59Barry Ritholtz?

  Oh, for sure. I would tell you, they're still pretty good at it.

• 22:03Speaker 05

  Well, I'm softening up because along the way, there, there was developed, which is an incredible development, almost as important as the development of the science, was the development of the fee only financial advisor, which is we started working with in the late 1980s.

• 22:21Barry Ritholtz?

  We're going to get to that question. I want to stay with Fama's insights and your ability to express that in a portfolio. The fascinating thing about DFA to me is that it's not simple market cap based indexing. The, the approach that you embraced early on was how can we express something that's a combination of what indexing would eventually become, married to a systematic factor based investing strategy?

• 22:57Speaker 05

  Right. And the, by the way, early on, even going back to the days at Wells, we have these two groups, you know, you ought to index and then the scientists saying, no, that you can do better than indexing, you know? And that's 45 years. That's, you know, that's been our message, which, you know, as a scientist, you wouldn't index for a lot of reasons. One is you're putting a constraint on yourself. I want to track an index. Constraints cost in economic terms. It's costly and we can get into where the cost is. The other part of it is the silly way that index funds have to, have to behave and.

• 23:39Barry Ritholtz?

  Because of the announcements of additions and deletions and.

• 23:43Speaker 05

  Yeah.

• 23:43Barry Ritholtz?

  Telegraph.

• 23:44Speaker 05

  Right. Standard and Poor's, if they add a new stock into their S and P 500 index today, it'll go in at tonight's closing price. If you are an S and P 500 index fund manager, then you want to buy that stock today at tonight's closing price.

• 24:01Barry Ritholtz?

  Even though you know it's going to run up in anticipation.

• 24:04Speaker 05

  Yeah, right. And even though you know that you're, every other S and P 500 index fund manager that's out there is also going to want that stock at tonight's. So that's where, you know, science, kind of probably all sciences are this way. There's a science and there's the art of the science. You know, you, you go to medical doctors, let's say they all study the same textbooks. Well, some of them just better at execution than, than others. And that's what we're talking about here. You know, if you, the simplest of all ideas is if you're trying to buy a stock at the same time everybody else is, that's probably not a good trade. You know, that's, the intuition would tell you that.

• 24:46Speaker 05

  And I think our most recent studies shows that the run up is about 4%. You know, when it goes into the index, the index pays about 4% more than, than the fair price.

• 24:57Barry Ritholtz?

  And the flip side is the deletions have a tendency to outperform the S and P over something like 12 or 24 months. Same thing, people sell in advance. By the time it's actually deleted, it's appreciably cheaper and maybe that becomes a, a value.

• 25:14Speaker 05

  Well, let me give you the downside of our approach, what we're talking about, which is you have to have a certain amount of trust in the manager. Because we're not slave. I mean, the indexing, you know exactly what, they track the gosh darn index. That's what they, that's all they said they would do. And our idea of saying, look, we will use a little flexibility, a little bit of human judgment along the way, not a lot, but you know, not like the old days of wild stock picking.

• 25:41Barry Ritholtz?

  Throwing darts.

• 25:42Speaker 05

  Throwing darts or whatever. But so we'll use a little bit of judgment. That requires you to have a little confidence in our ability to execute. So when we started, a lot of people said, look, how do we know you're, you can execute? Because when you go out and buy or sell, you're going to, you're going to be trading against professional investors that think they know, that they think they have undiscounted information, if you will. They, they have something special, special knowledge and you don't. Okay, well, it turns out there's a flip side to that, which is if you think you have special insight, if you're an active manager and you, you think you know something special,

• 26:24Speaker 05

  you also realize the half life of that is really short, minutes probably.

• 26:29Barry Ritholtz?

  Today it's probably milliseconds.

• 26:30Speaker 05

  Probably milliseconds. So you want to, if you want to get rid of a stock, you want to get rid of it right now, at least by the end of the day. And so we come along and we're kind of indifferent. We buy 10,000 stocks, you know, on any given day, you know, we, we don't buy all 10,000 and we buy it. And we kind of focus a lot on what's trading easily that day. You know, even a small company stock, you know, 20% of the time it trades a lot.

• 26:58Barry Ritholtz?

  In other words, you can use execution and volatility as a source of better pricing.

• 27:03Speaker 05

  Better pricing, yeah. So that's, and that's worked out over 45 years, you know? The first 45 are the toughest, I realize, but you know, but it's still, you know, people slap their forehead and it's, that's hard to believe that, that this professional money manager out there trading against you, you, it's not that we take advantage of them. We provide liquidity and we get, our, our clients get the benefit of providing that service, you know?

• 27:33Barry Ritholtz?

  And by providing liquidity, it means you're willing to be a buyer at times when many other people are not.

• 27:39Speaker 05

  Right. We're not going to pay retail for that stock, but I mean, if, if you can talk to me, can you do something for me on the price?

• 27:45Barry Ritholtz?

  Take a little, little something off. Very, really, really interesting. Coming up, we continue our conversation with David Booth, founder and chairman of Dimensional Funds Advisor, talking about his brand new book, Stay Calm: Learning to Embrace Uncertainty in Investing and Life. I'm Barry Ritholtz. You're listening to Masters in Business on Bloomberg Radio.

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  If you like YouTube, you'll love YouTube Premium. It's destroying athlete, creator, and YouTube Maxer. YouTube Premium enhances how I use YouTube with awesome features like offline downloads so I can download my favorite training videos before I hit the gym. So no Wi-Fi doesn't turn leg day into loading day. Plus I get ad-free videos, background play, and so much more. YouTube Premium, it's like YouTube got some extra gains. Try YouTube Premium for two months free at youtube.com/premium.

• 29:58Speaker 07

  Hey, what's up, guys? It's Haley Bailey. Okay, I need to tell you about something. I just got YouTube Premium. It's got tons of awesome features like offline downloads so I can download my favorite videos before I travel and watch them whenever I don't have Wi-Fi. Because we all know airplane Wi-Fi is the worst. I get ad free, I get background play, and there's like a ton more in there. You should try it. If you like YouTube, you'll love YouTube Premium. So try YouTube Premium for two months free at youtube.com/premium. Trial eligibility varies. Terms apply. Cancel anytime. That's a mouthful.

• 30:27Barry Ritholtz?

  I'm Barry Ritholtz. You're listening to Masters in Business on Bloomberg Radio. My extra special guest today is David Booth. He is the founder and chairman of Dimensional Funds Advisors. His new book is out, probably by the time you're hearing this, Stay Calm: Learning to Embrace Uncertainty in Investing and Life. So, so I want to sum up the book in a sentence and then we're going to really delve into it. Uncertainty isn't something to fear, it's where possibility lives. Explain that.

• 31:04Speaker 05

  Well, that is a good quote. Every now and then, you know, you write something down.

• 31:07Barry Ritholtz?

  By the way, I have a dozen fantastic quotes and I'm going to try and click through all of them from you.

• 31:12Speaker 05

  Yeah, no, it's funny because I mean, you write it and then you forget you wrote it and then you go back and look at it and go.

• 31:16Barry Ritholtz?

  Hey, that's not bad.

• 31:17Speaker 05

  That's not bad. Yeah, right. Yeah, no, it's, and not only.

• 31:24Speaker 05

  Let me tell you about, talk about a breakthrough that happened to us about 10 years ago. When we started, we realized that there are a lot of parallels between investing and your life experiences.

• 31:37Barry Ritholtz?

  Mm-hmm.

• 31:38Speaker 05

  And a lot of that has to do with how you deal with uncertainty. You know, as you grow, you learn how to deal with uncertainty. And what you realize is uncertainty is what creates opportunity. So if there were no uncertainty, you know, you wouldn't have had the ability to progress, you know. So it's not about eliminating uncertainty, it's about managing uncertainty. And that's, that's true in life. And the reason I bring that up is because that's also true in investing. If there are no uncertainty, in other words, if all investing was riskless, then...

• 32:16Barry Ritholtz?

  I got some 10-year treasuries at 3.5% that you can, you can hold and keep, barely keep up with inflation.

• 32:24Speaker 05

  Well, if there are no uncertainty investing, every investment would have the same return, the riskless return, whatever that is. So it's, in investing as well, then it's investing that creates, sorry, it's uncertainty that creates opportunity. And once people start to realize that, we go, let's go back, how do you deal with uncertainty? You know, well, first off, you realize that life is not totally predictable. I mean, think back 20 years ago, could you have predicted where you are today, or where you'll be 20 years from now?

• 33:02Barry Ritholtz?

  Nobody in December 2019 was predicting a pandemic the next year in a market that would scream higher.

• 33:08Speaker 05

  Yeah, right.

• 33:09Barry Ritholtz?

  So you could show it, every annual forecast we see, and we'll talk a little bit about predictions in a minute, but it's, it's, the future is inherently unknowable.

• 33:18Speaker 05

  And that's, so embrace that uncertainty, though. So that's what, that's what gives us the opportunity in life and investing.

• 33:25Barry Ritholtz?

  So, so what do you say to people who are investors, and, hey, uncertainty creates opportunity? How does the average mom and pop investor, how are they supposed to live through the regular 15, 20, 25% drawdowns we see all the time in equity markets?

• 33:46Speaker 05

  Well, the quick answer to that is stay calm. That's why we call, it's the name of the book.

• 33:51Barry Ritholtz?

  Right.

• 33:52Speaker 05

  I mean, you know, so, let me kind of give you a kind of an example of, of the fundamental problem we have with helping people come, stay invested. Let's say bad news comes into the market, the pandemic, or a particular, particular stock. And then you look at the stock or the market, and you see, it's down 20%, 20%, or whatever. You go, holy cow, I gotta get out, you know? As there's bad news and the market has things dropping, that is human nature, logic. What we'd like to have people think is, look, okay, pandemic, bad news came into the market.

• 34:37Speaker 05

  The market's down 20 or 30%, and people were saying, what are we supposed to do? What are we supposed to do? What, what do you think is going to happen? I go, hey, look, I don't know what's going to happen. And anybody that thinks they can predict what's going to happen, I'd be a little kind of suspicious about. But here's what I believe will happen. People aren't just going to sit there and take it. You know, kind of the cornerstone of all of my belief in markets and how they work is human ingenuity. That's what ends up bailing us out. You know, when bad things happen, you don't just sit there and take it in life, you figure out how to get back on track. And I go, so here we have the pandemic, that's hit, that's a big smash in the mouth to these

• 35:21Speaker 05

  firms, they're not just going to sit there and take it, they'll figure out how to get back on track, they'll try something new and different, and along the way, there'll be winners and losers, and I don't know who the winners will be and the losers, but what I do believe is we're likely, that effort, that human ingenuity, will get us back on track faster than most people think, which is what happened.

• 35:42Barry Ritholtz?

  We saw that during the financial crisis, the pandemic was less than a quarter, down 34%, and from that end of the first quarter in 2020, the S&P was up 69% for the rest of the year.

• 35:57Speaker 05

  Unbelievable. So that's where we're getting at. I mean, so what was going on, and this is what I get back to, what do you tell people to get through the tough times? Go back to first principles. Okay, we have the pandemic, and there are all kinds of forecasts, and, but the consensus was, I remember at the time, it's likely about a two or three-year kind of phenomenon. And so, the market's down about 20 or 30%, that, that seems about right, to me, I mean, I don't know, I mean...

• 36:25Barry Ritholtz?

  So in other words, it's already in the price, and trying to act in response to something everybody knows seems like a waste of time.

• 36:34Speaker 05

  Yeah, I learned that really in, I mean, in the late 90s, I was on an investment committee, I, I used to sit on investment committees, I don't anymore, other than our own. And the chairman of that investment committee went around the world, it was 1998, I don't know if you remember, but he had...

• 36:52Barry Ritholtz?

  Sure, long-term capital management?

• 36:53Speaker 05

  Yeah, long-term...

• 36:54Barry Ritholtz?

  I was on a trading desk, I remember that vividly.

• 36:56Speaker 05

  Yeah, right. You had the Russian default, you have Asia contagion, he goes around the world, the chairman of the, of the committee, says, and eventually talks about all the problems around the world, he concludes, so why should we invest in stocks at all? And I said, well, you know, I think you characterized what was going on in these different countries, okay, but I think all you've done is explain why the market's down 35%, you know? And he goes, ah, and we stayed invested, and of course, you know, we were amply rewarded. So if people could just go through first principles, and by that, I mean, bad news comes into the market, they look and they say, aha, the stock is down, now I want to get out because I'm stressed.

• 37:40Speaker 05

  If they, if we can get them to change their opinion and say, look, the market's down, I mean, the price is down quite a bit, that's, that's probably about right, given the bad news that we have. If they could go that, so therefore I need to stay invested. If I, I was thinking the other day, if I come out with a second book, maybe I'll call it Stay Invested, so it would have Stay Calm and Stay Invested.

• 38:02Barry Ritholtz?

  I think your, your second book should be named, What Would Gene Fama Say?

• 38:06Speaker 05

  Yeah, right.

• 38:07Barry Ritholtz?

  Right? If, if market's down 30%, what would Fama say? He'd say it's in the price.

• 38:11Speaker 05

  Yeah, right.

• 38:12Barry Ritholtz?

  And just sit there and relax, and stay calm.

• 38:14Speaker 05

  That's what, that's the science.

• 38:16Barry Ritholtz?

  Really interesting. So you mentioned some forecasts and predictions, another aspect of the book is, plan, don't predict. You can't foresee the future, so making decisions based on predictions is, you're essentially engaging in wishful thinking.

• 38:34Speaker 05

  Well, that's right. I mean, it's, you need to have a plan for going forward in life and investing, but don't waste the time on trying to predict the unpredictable. Markets are unpredictable, that's why the pros can't beat the market, because markets unpredictable. And yet, over the long haul, it's enable, if you go back, we haven't talked about the history, but 100 years of returns, that covers the Great Depression, World War II, you know, Korean War, high inflation, great financial crisis, pandemic, through all of that, 10% a year. I think a lot of what I do now, and particularly talking to students, is talk about the miracle

• 39:18Speaker 05

  of the stock and bond markets. These public markets are truly miracles.

• 39:23Barry Ritholtz?

  Really, really fascinating. Here's another thesis that I think is really very, very insightful. Control what you can, manage what you can't. You can't control crashes, recessions, interest rates, or any of that century of, of terrible events, but you can manage yourself, your allocation, your ongoing savings. Discuss that a little bit.

• 39:49Speaker 05

  Well, that's right. I mean, it's, in terms of dealing with, so it's all about managing uncertainty, so control what you can and manage what you can't, manage the uncertain part, you know, as best you can. Hey, you can't eliminate it, but you can manage it.

• 40:05Barry Ritholtz?

  But by manage it, you, you're talking about having a, a financial plan and sticking to it, continuing to dollar-cost average into it, like, there, there are things within your control, that's what you should be managing, and the things outside of your control, just accept you can't control what the Fed does, or what's happening in the strata hormus.

• 40:25Speaker 05

  Yeah, the, a lot of people, they, they make portfolio decisions based on their forecast of what the market's going to do, that's a waste of time. You want to pay attention to what's going on, because, you know, over your lifetime, there are going to be situations when you need to change your investment policy around, but it's not based on what's going on in the market. You need to change, you know, you get a new job, you want to retire, you know, you have a family, all these things cause you to invest differently. That's, that's what you, at every point, you want to have a long-term plan in place and manage to that. So you can't control the stock market, you can control how much risk you take, basically. There are two basic paths as you go down.

• 41:10Speaker 05

  First is the split, how much do you have in stocks at all versus relative riskless assets, like a money market fund, or a, or a bond. So you get that right. And then the second part is, then, to the extent you're investing in stocks, buy the whole market. People, you know, that's, that makes you as good as the insiders, you know? People that think of themselves as outsiders, that's another miracle of markets. Right now, you have it, unlike for my parents, who never had that available to them, you know, now everybody has access. The market is, is good for everyone.

• 41:45Barry Ritholtz?

  So let's talk a little bit about financial media, which you write extensively about in the book. Another quote of yours, "Modern financial media is designed to capture your attention, presenting commentary, stories, and expert forecasts that are nothing more than distracting noise."

• 42:05Speaker 05

  Yeah, that's right. I mean, today, we have, undoubtedly, we have a lot more data thrown at us than ever before. I don't know, we have a lot more meaningful information, but we have a lot more data, that's for sure. And so it's, it's important these days for people to think critically. Always go back to first principles. You know, this year in particular, been a lot of anxiety, we have, you know, some wars, and we have all kinds of things.

• 42:33Barry Ritholtz?

  Tariffs.

• 42:34Speaker 05

  Any number of things, you could be, but I, I tell people, look, you know...

• 42:41Speaker 05

  Do you think you have more anxiety today, or people have more anxiety today than during the Great Depression, or during, say, World War II, when it looked like we were losing at first? You know, those are real serious anxieties. So I'm not making light of the anxiety, but what the hundred years of data shows us is the market does a really a good job of pricing out all that uncertainty and the risks.

• 43:04Barry Ritholtz?

  So another quote in the same section, "In investing, success often comes not from doing more, but from tuning out more."

• 43:14Speaker 05

  Yeah.

• 43:15Barry Ritholtz?

  So I have to share this with you because every time I write, "Tune out the noise," I get a ton of pushback. "Hey, you can't just ignore all this. You can't tune it out. It's really difficult, and just telling people to tune out the noise is a waste of time." What's your argument back?

• 43:33Speaker 05

  Well, first, I'm glad to see you get your share of that. I just like it, just like I do. I go, um, basically, what we've outlined is you want to have sensible portfolios on the equity side by the whole market. And the market does a great job of pricing. So all the anxieties that you can express, and there are plenty of things to be concerned about, I'm not making light of them at all, you know, but that's why the prices are doing whatever it is they're doing. And so unless you're faster than the market, unless you think you're smarter than the market, you know, you just have to assume that whatever

• 44:16Speaker 05

  it is you're concerned about has already been priced in. You're too late. By the time, by the time you know a certain, by the time you get a certain piece of information, the market's already reflected it.

• 44:27Barry Ritholtz?

  It's already in the price.

• 44:28Speaker 05

  It's already in the price. You're too late.

• 44:30Barry Ritholtz?

  So this quote might be one of the most profound things I read in the book. And it was, it was, you know, you read it and you're like, wow, that's really insightful. At least that was my response. This isn't a book about how to invest. It's a book about how to think about investing. It's not about picking stocks. It's about taking stock of what really matters.

• 44:55Speaker 05

  Oof.

• 44:56Barry Ritholtz?

  Like, right?

• 44:57Speaker 05

  Yeah.

• 44:57Barry Ritholtz?

  I mean, that's an example. If you go back and reread it, I'm like, I wrote that? That's really, really good.

• 45:01Speaker 05

  That's not bad, yeah.

• 45:03Barry Ritholtz?

  No, that's damn fine. And it's because you are implying, hey, this is about securing your family's future, but it's not just about money. It's about all the things that really matter.

• 45:16Speaker 05

  Well, yeah, we have a segment in there about what you think is, what is true worth about, rather than true wealth? The, my parents, I describe as being wealthy. They just didn't have much money. So you want to, you want to focus on, on what's really important to you.

• 45:38Barry Ritholtz?

  The quiet dividend of patient compounding in both life and investing.

• 45:43Speaker 05

  Yeah. I mean, one of the things, first things you'll learn about in finance is the magic of compounding. You know, if you get that 10% return, you know, it means your portfolio doubles every seven years, you know? And you double it six times if you have a 42-year horizon. That's six, four, seven-year periods. So, um, and life is the same way, you know, you are the result of the effects of the compounding of decisions that you've made in life all the way through. And maybe that's where wisdom comes from, is that compounding of the effects of decisions, you know?

• 46:26Barry Ritholtz?

  Really, really interesting. I really enjoyed the book, Stay Calm, Learn to Embrace Uncertainty in Investing and Life. Coming up, we continue our conversation with David Booth, author of Stay Calm and founder of Dimensional Fund Advisors, talking about philosophy and philanthropy. I'm Barry Ritholtz. You're listening to Masters in Business on Bloomberg Radio.

• 46:49Speaker 01

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• 47:33Speaker 06

  If you like YouTube, you'll love YouTube Premium. It's destroying athlete, creator, and YouTube Maxer. YouTube Premium enhances how I use YouTube with awesome features like offline downloads, so I can download my favorite training videos before I hit the gym. So no Wi-Fi doesn't turn leg day into loading day. Plus, I get ad-free videos, background play, and so much more. YouTube Premium is like YouTube got some extra gains. Try YouTube Premium for two months free at youtube.com/premium.

• 48:02Speaker 07

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• 48:32Speaker 08

  If you enjoy Bloomberg podcasts, you'll love listening to Bloomberg 991 FM in the DMV. Hi, this is Nathan Hager. Here in the district, the story is always changing. From the White House and Capitol Hill to K Street, Wall Street, and the Fed, Bloomberg 991 keeps you connected to the news that's driving decisions in the nation's capital and around the globe. Check us out at 991 FM or stream us anytime on the Bloomberg Business app.

• 49:01Barry Ritholtz?

  I'm Barry Ritholtz. You're listening to Masters in Business on Bloomberg Radio. My extra special guest today is David Booth. He is founder and chairman of Dimensional Fund Advisors and author of the new book, Stay Calm, Learn to Embrace Uncertainty in Investing and Life. So I wanted to talk a little bit about both your philosophy and how it developed and philanthropy. We'll circle back to philanthropy in a minute. But let's talk a little bit about Dimensional. You guys didn't want to participate in ETFs

• 49:41Barry Ritholtz?

  for a long time because you preferred to offer your products through advisors to investing customers. What was the idea of working through the advisor side of it as opposed to marketing directly to Main Street?

• 49:58Speaker 05

  Well, first off, in any business, you know, the marketing is a big, you know, component to any business. Now, you have to understand, we're starting out of my brownstone in my apartment. It wasn't like we had a big marketing machine, and we didn't know anything about selling to the retail public. We did know institutional investors. And so our first clients were large, typically pension funds, insurance companies, sovereign wealth funds. And that was first eight years or so, that was who we talked to. And then one day,

• 50:43Speaker 05

  Dan Wheeler came along. He was a financial advisor in Sacramento.

• 50:46Barry Ritholtz?

  In California, right. I know the name.

• 50:48Speaker 05

  Yeah. And he said, I'd like to have access to your funds. And so we don't know. But at that time, it was kind of unusual for a firm like ours to get big institutions to invest in a mutual fund. But that's, we created a mutual fund. And because they were institutional clients, our fees were very low, you know, institutionally priced. And so it made ideal for a financial, a fee-only financial advisor. A fee-only advisor being one that we don't pay them any money, they don't pay us. I mean, it's straightly arms length, you know?

• 51:27Barry Ritholtz?

  What year was that with Wheeler?

• 51:29Speaker 05

  About 18, 1989.

• 51:32Barry Ritholtz?

  So that was long before advisors had taken over from stockbrokers.

• 51:39Speaker 05

  Right.

• 51:39Barry Ritholtz?

  The fiduciary side of the business was still relatively tiny.

• 51:44Speaker 05

  It was tiny, but these were highly energized financial advisors. I mean, these were typically advisors who had come from a wirehouse, felt really dirty about themselves. And I'm just repeating what they told me.

• 51:57Barry Ritholtz?

  Oh, no, I've heard it a million times.

• 51:59Speaker 05

  Yeah. And to see this approach, which is based on science, is you have all the data you could ever want backing up what we do. And you could come up with a sensible investment approach that undoubtedly would work over the long haul.

• 52:16Barry Ritholtz?

  I had, I had someone leave from a wirehouse, become an advisor, and I asked them why. This is early 2000s. And I'll never forget, the line I was told was, "They're called brokers because they made their clients broke."

• 52:34Speaker 05

  Okay.

• 52:34Barry Ritholtz?

  And I'm like, wow, that talk about feeling, I got to get out of this side of the street.

• 52:39Speaker 05

  Yeah, it doesn't, it doesn't have to be that way. But observe, the ability to beat the market is such a narrow advantage, you know, that it takes an incredible firm. I mean, we, we're a professional manager, and we can do things that a retail client can't do. The, and that has nothing to do with picking stocks, let's keep in mind, but dealing through market mechanisms, the way you trade, securities lending, you know, so on and so forth, you know?

• 53:14Speaker 05

  There are things we can do, but the margins are very slim. The idea that somebody way down the food chain, a broker at a retail, would have some of that magic is hard to accept.

• 53:30Barry Ritholtz?

  So when you guys began working with advisors, it wasn't to design portfolios? The advisor was there essentially to keep the client from abandoning their portfolio and getting in the way of compounding?

• 53:43Speaker 05

  Yeah, absolutely. We have said that, one of our advisors said it right. He said, "You know, I don't have clients with investment problems. I've got investments with client problems."

• 53:54Barry Ritholtz?

  That's a great line.

• 53:56Speaker 05

  But the difference is, between the two, is education. And we've always sold, as you know, through education, where we invite people in for seminars and stuff. And the book, I mean, that's why you would do the book, is to help people better understand how markets work, so they will be more confident that they can have a good investment experience.

• 54:17Barry Ritholtz?

  You guys have done a good job on the education side. I'm kind of curious if that's the reason why you stayed out of ETFs for so long. And, you know, for people who are trying to put this in context, DFA launched in 1981. In 2020 was your first ETF. And today, you are the largest active ETF issuer in the country.

• 54:43Speaker 05

  Yeah, right.

• 54:44Barry Ritholtz?

  So why leave all that money on the table for 40 years?

• 54:47Speaker 05

  Well, it must have been a pandemic, you know, something. Anyway, no, it's, because early on, our advisors said they didn't need the ETF. The beauty of a regular mutual fund is you go in at net asset value at the end of the day.

• 55:04Barry Ritholtz?

  Sure.

• 55:05Speaker 05

  That's about as clean as you can come up with. If you buy an ETF, you're buying it in the open market. And for some people, that's a little scary.

• 55:14Barry Ritholtz?

  Whatever the open market cost might be, the offset of the tax advantage has to wildly out. In a non-qualified account, ETFs are vastly superior to mutual funds most of the time for that tax reason.

• 55:31Speaker 05

  Well, to a conventional mutual fund, I agree with you. But, you know, we've been able to

• 55:36Barry Ritholtz?

  Use the dual class.

• 55:37Speaker 05

  Yeah, have, we've been able to eliminate a lot of the tax advantage of ETFs.

• 55:44Barry Ritholtz?

  By the way, that's you and Vanguard seem to be the leaders in that space for having an ETF and a mutual fund essentially track the same holdings.

• 55:56Speaker 05

  And now, and it's coming out this summer and into the fall, we are innovating even more, which is we're taking, right now, we have mutual funds and ETFs that do the same thing. So two pools of money doing the same thing. SEC has given us approval to merge those two. So it'll just be one pool of assets with two ways of accessing it.

• 56:22Barry Ritholtz?

  Two different wrappers, same pool of money.

• 56:23Speaker 05

  Same pool of money. So that will eliminate, take away the argument. I mean, you don't have to worry about it anymore.

• 56:31Barry Ritholtz?

  That's really, that's really

• 56:33Speaker 05

  Isn't that cool?

• 56:34Barry Ritholtz?

  Yeah.

• 56:35Speaker 05

  That speaks to how science is developing, you know? It's not like we set on our hands after, we're continually trying to work through things and become more efficient.

• 56:45Barry Ritholtz?

  So let's talk about another philosophical belief from you guys that I'm fascinated by. People have had a hard time wrapping their head around, well, is DFA an indexer? Are they an alpha sort of chaser? And the way I kind of explained it to myself was, no, they're, when you look at traditional indexers, they're just using one factor of the many pharma French factors. And what Dimensional has said is, hey, we're going to use three, four, five factors. So we're indexers plus the next four factors on the list. Is that a fair philosophical breakdown?

• 57:27Speaker 05

  That's, yeah, that's part of what we do, is exactly that. And there are some people that don't want to have a bias towards value or small cap. And for those, we have kind of plain vanilla funds, too, that aren't biased. But in both cases, it's about execution. We've talked about how an index fund has to trade in a bizarre sort of way. And we don't do that. So we apply that thinking to all the funds. So that, here again, what we're trying to do is apply the science.

• 58:11Speaker 05

  And by that, the way we structure portfolios, we think we can do better than index providers. And secondarily, the way we trade relative to the way index funds trade. That's true in everything we do. But then we, some clients like to have a small cap bias, some don't, you know? So it's their money. We try to come up with whatever they think is sensible.

• 58:37Barry Ritholtz?

  So let's talk a little bit about philanthropy, because I know part of the book discusses legacy, and you've been very involved philanthropically. A decade ago, you signed the Giving Pledge. And I go back two decades, you made a, right around the time of the financial crisis, a gift in '08 to the University of Chicago's Business School, which I think was the largest gift ever in the country, or to Chicago at that time, $300 million. And now it's the Chicago Booth School of Business. Tell us a little bit about what motivated a gift of that size to that recipient, and what are your thoughts 20 years later?

• 59:21Speaker 05

  Well, okay, first, let me just say, it was kind of funny. The announcement for that was made in November of 2008, like the week after Obama got elected for the first time. And so there was a big announcement at the school, said, "Big announcement's coming tonight. Free food, come in." And they thought it had something to do with

• 59:43Barry Ritholtz?

  He's a Chicago guy, right?

• 59:45Speaker 05

  Yeah, he's a Chicago guy. So that's when they announced that the school's name was, name change. So it's

• 59:52Barry Ritholtz?

  Which, by the way, wasn't a requirement of your gift.

• 59:56Speaker 05

  No.

• 59:57Barry Ritholtz?

  You argued against it.

• 59:58Speaker 05

  No, I didn't argue against it.

• 59:59Barry Ritholtz?

  I heard through several people that you pushed back initially.

• 1:00:03Speaker 05

  Well, I pushed back a little bit, but not a lot. It was, what happened was, I approached the dean of the business school and said, you know, it's time for payback here. You know, what the university's done for me and the faculty, and not only training me in school, but then following up over the years, over the, now 45 years.

• 1:00:25Barry Ritholtz?

  Decades, yeah.

• 1:00:26Speaker 05

  You know, people like, you know, we've had five Nobel laureates work very closely with us, all of them been significant directors of our mutual fund or the company, Pharma being the founder as well. It's time for me to pay back, and it's got to be a big chunk of what I have. So this is what I'm willing to do. And the dean looks at it and goes, you know, we were thinking about naming the school, and we weren't asking for nearly as much. We'll name the school after you. I go, okay, well, whatever, you know? But it was, it was about me wanting to feel good about me.

• 1:01:03Barry Ritholtz?

  Well, you feel a sense of obligation to the University of Chicago, because of everything they gave you. Undergraduate and pre-PHDA MBA, you were at Kansas, and you, similar number, last year, you gave them $300 million to the Kansas, University of Kansas Athletics Group. Why focus on sports there? What's so significant about the Kansas Athletics? Because, by the way, they were, as a school, they've been doing pretty good athletic-wise.

• 1:01:37Speaker 05

  Yeah, yeah, well, no, it's, first off, Lawrence, Kansas, where the University of Kansas is, is my hometown. I went to Lawrence High School, and then University of Kansas. So, and with all the relatives, it's in my blood. And For a school, a big state school like that, what's really important is to have a great competitive athletic program. I mean, I know the arguments, some people, you know, they're not so sure about that, but.

• 1:02:09Barry Ritholtz?

  It doesn't hurt their marketing, their ability to recruit professors to

• 1:02:12Speaker 05

  It is, it is.

• 1:02:13Barry Ritholtz?

  Make the town better. I mean, it just multiplies across everything, regardless of how you feel about, you know, big football in college.

• 1:02:23Speaker 05

  Yeah, right. But I happen to love it, and particularly love college basketball. That's where, and Kansas has always been, you know, really good at basketball, and it's getting better in football. So, and then with NIL, throw in a little dollop of NIL coming down the pike.

• 1:02:38Barry Ritholtz?

  Name, image likeness for get some money to the students.

• 1:02:41Speaker 05

  Students. So it puts, you know, great financial pressure on the schools. And it's difficult for a state school to have a big budget for athletics when their professors are not here making what they're making. So it's important for private, you know, for alums and whatever, you know, to step up and in order to help them be successful.

• 1:03:11Barry Ritholtz?

  And I'm going to assume that, that this isn't the end of your academic gifts. You're going to be doing other stuff in the future. And obviously, the giving pledge is a part of that. But I have to ask about a purchase you made in 2010, which is you bought Naismith's original document of essentially, here are the rules of basketball. This is where basketball was invented. And I think you paid over $4 million for that, and then you gave it to the University of Kansas Athletic Department. Explain, tell us about that.

• 1:03:47Speaker 05

  Well, no, it was really kind of an interesting auction. James Naismith invented basketball in 1891. If you think about it.

• 1:03:56Barry Ritholtz?

  Peach, peach crate?

• 1:03:58Speaker 05

  Yeah, the whole thing. It's the only major sport that I can think of, or we know who invented it. So it was a class assignment for him at school at the YMCA in Springfield, Massachusetts. So they stayed in the family. And as things happened over time, they decided that they wanted to sell it. So I decided, here again, basketball is so important to, if you live in Lawrence, Kansas, you realize that the rules of basketball, those two typewritten pages need to be in Lawrence, Kansas, because Naismith, after he invented the game, goes

• 1:04:43Speaker 05

  to teach at Kansas for 40 years. He's buried in Lawrence. You know, you gotta, so I realized that.

• 1:04:49Barry Ritholtz?

  Perfect match.

• 1:04:50Speaker 05

  Had to buy it. So it started off, they thought it would go for about $2 million. But along the way, I started, I was bidding over the phone, and there was somebody else bidding over the phone, and kept ratcheting up and ended up paying about $4.5 million. The person on the other end of the phone was David Rubenstein.

• 1:05:08Barry Ritholtz?

  Get out. Oh, that's hilarious.

• 1:05:10Speaker 05

  Your Bloomberg guy.

• 1:05:12Barry Ritholtz?

  Co-host, or fellow host. That's amazing. Did, did, did you explain eventually to him why you bought that and why it went to Kansas?

• 1:05:20Speaker 05

  No, he, once I paid for it, it was announced who I, who bought it. So he sent me an email the next day saying, hey, I think I cost you some money. Which is funny. So we, we still have a good chuckle about that.

• 1:05:35Barry Ritholtz?

  So, so last piece of philanthropy I have to ask about before we get to our favorite questions. You're known as an avid art collector. If you go down, I don't know what river that is in Texas, but I've been on that boat, you could see some of your sculptures

• 1:05:52Speaker 05

  Right.

• 1:05:53Barry Ritholtz?

  From, from the river. If you're, you're in a boat, you've endowed a conservation center at the Museum of Modern Art, and the, as opposed to just donating a sculpture or a painting, you're essentially helping them preserve their entire collection in perpetuity. Tell us a little bit about that.

• 1:06:13Speaker 05

  Well, I mean, preserving, you know, your patrimony is important for any country. And art is such a big deal. And MoMA has such a great museum.

• 1:06:24Barry Ritholtz?

  Spectacular collection.

• 1:06:25Speaker 05

  Spectacular.

• 1:06:26Barry Ritholtz?

  Of which, like, 3% is displayed at any time.

• 1:06:29Speaker 05

  Yeah, it's, um.

• 1:06:32Barry Ritholtz?

  It's an enormous, enormous collection.

• 1:06:34Speaker 05

  Yeah. It's complicated. So I, I've sat on the board there for about 10 years now, and it's just really been tremendously exciting. And then endowed the conservation lab, because that's easy to overlook, conservation.

• 1:06:48Barry Ritholtz?

  Yeah.

• 1:06:49Speaker 05

  But taking care of particularly modern art, which could be some fiberglass or something, who knows what kind of stuff goes in.

• 1:06:58Barry Ritholtz?

  To say nothing about how paint decays, how canvas decay, paper, all that stuff is, you know, problematic over time.

• 1:07:08Speaker 05

  Yeah, in the old days, probably was kind of, conservation was somebody kind of having a couple sips of alcohol and, and dabbing some paint on a painting and trying to clean or whatever. It's, that's changed. Now, it's incredibly sophisticated. You take x-rays of the painting or whatnot. It's studying the chemistry of it. So I'm, I've headed up that conservation committee for quite a while now. It's very exciting to see what they've done to maintain the art.

• 1:07:38Barry Ritholtz?

  Really interesting. All right, I only have you for a couple of more minutes. Let's, let's, and you and I can continue this conversation in Southern California in Huntington Beach in a few weeks. For now, let's jump to our favorite questions we ask all of our guests. Starting with, tell us about the mentors who helped shape your career. And I have a pretty good idea

• 1:08:00Speaker 05

  Yeah, right.

• 1:08:01Barry Ritholtz?

  Who they are.

• 1:08:02Speaker 05

  Well, no, that's right. Let's just start with the Nobel laureates, Merton, Miller, Gene Formam, Aaron Scholz, Bob Merton, and Doug Diamond. Kind of an impressive group of characters.

• 1:08:14Barry Ritholtz?

  That's a murderer's row, right?

• 1:08:15Speaker 05

  Murderer's row, yeah. Then I had Mac McQuown, who really started indexing at.

• 1:08:23Barry Ritholtz?

  And then really was the initial, was he the first check into DFA?

• 1:08:29Speaker 05

  No, he was, he was a founder. In fact, more important giving us, investing in the funds, he helped us raise the money, the risk capital for, for the firm. So, and then I always have to throw in my parents. I mean, they, it ties into what true wealth is about. They never had much money, but they were wealthy. They, I understand, I, they'd figured out what life was about.

• 1:08:58Barry Ritholtz?

  Really, really interesting. Let's talk about books. In addition to yours, what, what are some of your favorites? What are you reading currently?

• 1:09:05Speaker 05

  Well, I mean, I just finished 1929, Andrew Ross Sorkin's new book. That's very, very interesting.

• 1:09:12Barry Ritholtz?

  That is on my nights, then. It's up in a few books in my queue.

• 1:09:16Speaker 05

  Then I, in the last couple of years, a book I've really liked a lot was Paris, 1919 by Margaret MacMillan. And she takes through what became known as the Treaty of Paris. When the armistice was signed at the end of World War I, that's just when all kinds of crazy things happened, because the Ottoman Empire collapsed, the Russian Empire collapsed, Austrian Hungarian Empire collapsed. So all of these, so you had to create new countries all over the place, all through Central Europe and the Middle East. These were, it took about six months to develop the Treaty of Paris. The first five or so,

• 1:10:00Speaker 05

  they didn't do much. And then all of a sudden, the last month, they just got together and great. I don't know if they could have done much better, but it was pretty chaotic.

• 1:10:07Barry Ritholtz?

  Huh. Really interesting. I'm going to add that, I'm going to add that to my list. Tell us, are you streaming anything? What, what do you do to relax? Podcasts, movies? What, what entertains you?

• 1:10:19Speaker 05

  Well, I mean, your podcast, but the, we have a new season of Ted Lasso, which I'm really all over, you know.

• 1:10:26Barry Ritholtz?

  You are. My, my wife and I are waiting for there to be more than three or four in the queue. It's just too frustrating every, to watch one a, one a week.

• 1:10:34Speaker 05

  By the way, he's a KU alum as well.

• 1:10:36Barry Ritholtz?

  Yes, yes, I knew that.

• 1:10:37Speaker 05

  So, the, and we have any number of series. You know, what happened was, when the pandemic hit, and he couldn't go out much, I watched more TV in that two-year period than I ever watched before since.

• 1:10:51Barry Ritholtz?

  Same, absolutely the same. It's, it's, and, and it's, I, I was mentioning the other day that 6:30 is the new 7:30. It used to be, if you tried to make a dinner reservation around 7:00, 7:30, it's the toughest reservation to get. And now, it seems the hard reservation is to get, is 6:00 or 6:30.

• 1:11:12Speaker 05

  Yeah, right.

• 1:11:13Barry Ritholtz?

  And it's not just that we're aging and heading towards the early bird special. I think people want to go to dinner and then come home and watch whatever it is, Ted Lasso, or Lioness, or Yellowstone, whatever their, their, their thing is. It's, it's so funny you say that. But the pandemic was absolutely the most TV I've watched in my life.

• 1:11:33Speaker 05

  Right.

• 1:11:34Barry Ritholtz?

  Our, our final two questions. I think this book offers a lot of interesting advice, but I want to ask you specifically for a recent college grad who is interested in a career in either investing, or wealth management, or anything along those lines, what sort of advice would you give them about building a career?

• 1:11:57Speaker 05

  Well, first off, I don't give advice. But here's, here's some thoughts. First is thoughts that probably everybody will tell you. Figure out where do you have some skill, some comparative advantage or competitive advantage. And what, what do you have, what are you passionate about? So marry those two things, passion and skill, and work really hard. Now, the part that I don't think is emphasized enough is, when you, by the time you get out of school, you develop a set of values, your personal set of values. Pay attention to that. So.

• 1:12:40Speaker 05

  Find something you're passionate about, that you have a skill in, that, you know, kind of maps into your values. And, you know, pay attention to those values and, um, and don't deviate from them in pursuit of just, um, short-term job. I mean, when you get out of school, like when I got out of school, most people, you're just lucky, find any good job. I mean, but over time, you can, you can iterate towards what you're really, what do you think is really valuable?

• 1:13:14Barry Ritholtz?

  Good advice or, or, or good insight. I know you don't like to call it advice. Our final question, what do you know about the world of markets and investing today that might have been useful back in 1981, when you were first launching Dimensional Funds?

• 1:13:34Speaker 05

  Well, I think the big, one of the big things there is that if I didn't realize how difficult it would be to persuade people about this new way of thinking about investing. I mean, because I'm sitting there, of course, I'm totally wound up with all the University of Chicago stuff. I mean, I'll have all the science, the data and so forth. I go, once you explain that to people, they'll flock to it. You know, it's, I've been doing this for 55 years. I mean, people don't flock to new ideas just based on, um, on new research or new ideas. You have to soak the ground down around them, let them sink into it. So I guess if I'd known how hard it was, I don't know if I would have pursued it, but I think we're getting close.

• 1:14:19Speaker 05

  So that's what, now I'm in this phase where it's exciting to explain all this stuff to people because they're starting to respond to it. And I really find it great.

• 1:14:27Barry Ritholtz?

  You're getting close. Keep at it. Eventually you'll convince a few people.

• 1:14:31Speaker 05

  Good.

• 1:14:32Barry Ritholtz?

  David, thank you for being so generous with your time. This has been absolutely delightful. We have been speaking with David Booth. He is the founder and chairman of Dimensional Funds and the author of Stay Calm: Learn to Embrace Uncertainty in Investing and Life. I would be remiss if I didn't thank the crack team that helps put this conversation together each week. Alexis Noriega is my video producer. Sean Russo is my researcher. Anna Luke is my podcast producer. I'm Barry Ritholtz. And before I say so long, I just want to thank Alexis for being a fantastic video producer

• 1:15:16Barry Ritholtz?

  and helping to put this podcast in the world of YouTube and videos. She is departing to take a full-time gig. That's a big promotion for her and we wish her the best of luck going forward. I'm Barry Ritholtz. You've been listening to Masters in Business on Bloomberg Radio.