Ep. 1406: David Booth Interview with Michael Covel on Trend Following Radio

My guest today is David Booth. David is the chairman and co-founder of Dimensional Fund Advisors. He is a businessman, investor, and philanthropist. He is known for applying financial science to investing and advocating disciplined, long-term strategies that embrace market uncertainty. The topic is his book Stay Calm: Learn to Embrace Uncertainty in Investing and Life. In this episode of Trend Following Radio we discuss: Staying calm and embracing uncertainty in investing and life Building Dimensional Fund Advisors and the small-cap investment approach Market efficiency, prediction limits, and long-term investing Science, behavioral economics, AI, and investment decision-making Entrepreneurship, human ingenuity, and adapting for long-term success Jump in! --- I'm MICHAEL COVEL, the host of TREND FOLLOWING RADIO, and I'm proud to have delivered 10+ million podcast listens since 2012. Investments, economics, psychology, politics, decision-making, human behavior, entrepreneurship and trend following are all passionately explored and debated on my show. To start? I'd like to give you a great piece of advice you can use in your life and trading journey… cut your losses! You will find much more about that philosophy here: https://www.trendfollowing.com/trend/ You can watch a free video here: https://www.trendfollowing.com/video/ Can't get enough of this episode? You can choose from my thousand plus episodes here: https://www.trendfollowing.com/podcast My social media platforms: Twitter: @covel https://twitter.com/covel Facebook: @trendfollowing https://www.facebook.com/trendfollowing/ LinkedIn: @covel https://linkedin.com/in/covel/ Instagram: @mikecovel https://www.instagram.com/mikecovel/ Hope you enjoy my never-ending podcast conversation!

• 0:00Speaker 00

  My guest today is David Booth. David has had quite the success. He is the current chairman of Dimensional Fund Advisors. I believe they have 800 billion under management. Today, we discuss his life and career and his book, Stay Calm: Learn to Embrace Uncertainty in Investing and Life. I thoroughly enjoyed this conversation. I hope you do, too.

• 0:41Speaker 00

  To put a book out like that after a long storied career and to have the title include the word calm, I've never met you, I've never watched the video of you, I thought to myself, this man must be calm.

• 0:57Speaker 01

  I think there's a bit of truth to that. Basically, you know, even in life, if you make good decisions, more comfortable you feel in your decisions, the more calm you are. So it's really about helping people, how can we help people make better decisions when it comes to investing? And our view is if people knew better about how markets work, public markets, they'd be able to make better decisions, be more confident that they can meet their investment objectives, and just be better able to stay calm.

• 1:25Speaker 00

  Let's see here. You've got me as an interviewer tonight, and I would be amiss if I didn't try to unpack a long life, an interesting life, a lot more interesting than we'll have time to talk in this conversation. But perhaps you can take me back to a moment, an early moment. I often do this myself. I'm in my 50s. I'll go back to moments, perhaps, you know, 12, 13 years old, I was playing baseball, things happened to me that were interesting at that point in time. Is there an early moment for you where you look back and you say, wow, that moment really set me off in a good way?

• 2:04Speaker 01

  Well, yeah, there are several moments like that. One of them actually, a little bit later than that, and the PhD program at the University of Chicago, and I went home for Christmas break. Our family went down to my paternal grandparents. They lived in this small little town, and they didn't have indoor plumbing, you know, they had an outhouse and linoleum floors. And the relatives on that side of the family were largely farmers. The siblings came and the grandkids and all kinds of great food. And I'm looking around and these people on Christmas Day, they were just having a great time. And I was totally stressed out. And what I realized from that was that a couple of things. One was they'd kind of figured out what life was about, which is they were having a good time. And

• 2:48Speaker 01

  I was stressed out. So I realized I was probably on the wrong path. I wanted to be like them. And so that's when I decided, hey, look, maybe I'm better off not being a professor. And at the same time, these great ideas were just kind of exploding at Chicago and all these great people I was being able to hang around, and none of them were interested in applying the ideas. So it was just a stroke of luck that decided I'm, I think I'll go out there and try to figure out how to apply these ideas.

• 3:16Speaker 00

  I'm still going to keep you at your youth a little bit here because I really want to kind of unpack. So as you share that story with me, I can remember visiting family members on the farm in Scranton, Pennsylvania. And it reminds me of something that you were just saying. And when I look back too, I can think of some great uncles, and they never left the farm. Their brothers became doctors and surgeons, but they never left the farm. And they did seem happy when I met them as a young guy. And I think too, as I get older, I'm like, well, and this is where I'm going, as you lay that out, is that we want that kind of feeling you described on Christmas Day. But then if you happen to be a precocious kid that has some other ideas that you want to travel down. So how

• 3:59Speaker 00

  do you balance that where you kind of keep the farm boy, and then you've also got this intellectually driven kid over here, right? That's the challenge, isn't it?

• 4:07Speaker 01

  Well, it is. And it does tie into a bit into investing as well, which is to begin with, what's really important to you in life? What's true worth mean to you? I mean, family, friends, health, money, whatever. You know, money is down the list beyond a certain level. It gets to be down the list pretty far. Once you figure that out, then you can figure out better how to invest. And then going back to the farming example, you, once you figure out that this is a kind of a lifestyle I like, then you've got it. I just knew my lifestyle wasn't in the farming community. And I was fortunate to be at a time where I had an opportunity to do exactly what I wanted to do, which was kind of educate everybody and not just a few classroom.

• 4:52Speaker 00

  Kansas, your home state, correct?

• 4:54Speaker 01

  Yeah.

• 4:55Speaker 00

  I know you're a big benefactor to your university. And so there's still a connection there. But then I can see, obviously, you've had a connection to New York City for a long time, too. It sounds like you've kind of kept a foot in each world.

• 5:07Speaker 01

  Well, yeah, I mean, it's basically people are people. You find good people everywhere, even in New York, even in Kansas. But it goes back to, you know, leading life according to what's really important to you and what your values are. You can do that almost anywhere.

• 5:22Speaker 00

  When did you know exactly, as a guy who has built a very large company over many decades, and I'm going to let you take some time, I love the story of the extra bedroom up in New York City, how you got started. I mean, it's a true, almost like the Steve Jobs garage story, it sounds like in a way, you know? When did you know for sure, wow, I'm in the middle of something, I see an opportunity, I'm not stopping, this is it, I'm going all the way?

• 5:51Speaker 01

  With our firm, there's kind of two parts to it. One is, almost right away, we realized, and going out and talking to prospective clients and stuff, we were sitting on something terrific. The second part of it, though, was, can we achieve enough success? Can we get enough clients in fast enough so we can survive? The trick was, can we hang in there long enough? Because we had no capital, really.

• 6:13Speaker 00

  You started in 1981?

• 6:14Speaker 01

  Yeah. At that time, interest rates were 15% or whatever, double-digit inflation. You wonder why you would start an equity fund, but we did. But it takes a while, even if you have a great idea, it takes a while for the money actually, clients to give you the money and get it processed. And so you can have a little bit of revenue coming in. And that was really the challenge. So the quick answer to your question is that once we started having a bit more revenue than our cost, then I thought, well, yeah, we're going to make it now.

• 6:43Speaker 00

  We're starting 81. At what point did you know after starting in 81, okay, this is my life, it's going to work?

• 6:50Speaker 01

  I think by the end of 82, we had about 800 million under management. And so at that point, and I thought we were in good shape.

• 6:58Speaker 00

  Okay, there's going to be a lot of people that are listening right now, and younger people perhaps. And I look, a lot of people are always fascinated, I've seen this in my world, people want to know how great investors, great traders gather assets. You're laying out a case, and we're going to talk about the strategy in a moment, but you're laying out a case of going from essentially zero to 800 million. In the early 80s is a really big jump. How did that happen? Brianna, the investing strategy, which we'll get into, what were you doing? What was unfolding? What allowed that to catch fire so fast?

• 7:30Speaker 01

  It's actually a great story about how science meets marketing. The science we had in our hip pocket with, we had all these academics, they were helping us out, Gene Fama, Merton Miller, Myron Scholes, all of whom got Nobel Prizes. And so the people, we had a lot of credibility because of the people we were associated with. But that isn't sufficient. What we had was a great idea, let's call it marketing. Back in those days, 1981, our initial clients were all large pension funds and sovereign wealth funds and insurance companies. And we had a simple story to tell, which was, look, we think if you're investing in stocks, you ought to have stocks for large and small companies, not just all have all your money in large. And in 45 years, everybody's nodded

• 8:13Speaker 01

  on an agreement on that, yeah, that makes sense. And I go, well, you're not holding small companies in any meaningful amount. And go, well, that's true, too. And so our argument, we'll give you access to small companies. We were the first people to use the term small cap, and really the first to treat small cap as a separate kind of asset category. And the reason you're not holding the small companies is because of the way you invest. I mean, you are just hiring very active stock pickers, which is fine, but they can't build a business just in small companies. So that's why they're kind of absent. Just you get the odd small company. Most of the small companies you're holding once were large companies. We had a great story. You ought to have large and small. You don't have small, we'll give you access to small. That's about as good as it gets

• 8:58Speaker 01

  in terms of starting a firm. So the idea was so strong, we could overcome the fact that we had no track record, we were a new firm, how's the portfolio managing out of the portfolio out of my spare bedroom? We could overcome all of that because the idea was just so strong.

• 9:14Speaker 00

  I don't want to go off on a tangent, but you just mentioned three of your, I guess, mentors that all won Nobels. And if we had to fast forward less than two decades to the summer of 1998, two of those fellows, I think, had a very interesting experience in long-term capital. And I imagine you must have been sitting back and saying, I'm confused at some level, not because of positions that you had. I mean, everybody was pretty petrified back there in the summer of 98.

• 9:42Speaker 01

  It was a tense time. The long-term capital story was that they had kind of the hall of the dream team of quants coming together, created a firm, and they, for a while, they had enormous success. And then it blew up very suddenly, which is unfortunate. These people really were bright, but sometimes the brightest people overlook some of the simplest things. I mean, they basically got done in by the classic problem was being overly leveraged. And if you're over, if you're leveraged way too high, then any kind of hiccup can destroy you, which is what happened to them. And Myron and Bob Merton, who's our resident scientist now, he was on that dream team, another Nobel laureate, they would stand up and they'd go, yeah, we made a mistake. Some of the people on their staff would say, oh, the

• 10:27Speaker 01

  market made a mistake, which is kind of a silly argument to make. But these guys are stand-up guys.

• 10:31Speaker 00

  What's interesting right now, too, we're living through a moment where things happen fast and furious these days. And yeah, and we're going to backfill into your strategy and your whole philosophical outlook. But as I bring up long-term capital management, I look at the entire country of Korea, it looks like they did not learn the lessons of long-term capital.

• 10:49Speaker 01

  That's a complicated story with Korea, you know, for sure. We'll see what happens. But it's, one of the funny things there is it's still considered to be an emerging country by, in a lot of indices, you know? If you travel over there, it looks pretty developed to me.

• 11:03Speaker 00

  Well, I'm in Ho Chi Minh City, Vietnam right now, and you can look out the window. It's pretty developed right here, too.

• 11:08Speaker 01

  That was very good.

• 11:08Speaker 00

  Yeah. Hey, listen, you've got this way of thinking. We've talked about the calm part, but I love this. And this applies far beyond investing. How are you going to think and act? How are you going to think and behave when you don't know what's gonna happen next? I can't go a day without stumbling into people that are so certain about everything. And I just ask myself, how can you be so certain? You don't know. And I love that you've kind of got this philosophy, which people are listening closely to you today. They're going to start to understand it's far beyond investing. The idea of like, hey, there is no certainty, but you could do something up here with the six inches between your ears.

• 11:50Speaker 01

  To the extent you know something for sure, I mean, those kinds of decisions are very complicated. But the problems in life usually are associated with uncertainty. I mean, in your personal life as well as investing. And I think the first mistake people make is they think they can predict things that are unpredictable. You can't predict the stock market, what's going to happen at the market. What you can do is figure out how much risk you can want to take. You can develop a plan and you start with a plan for going forward of here's how I'm going to invest. And you see how that works. And based on the results, you kind of adapt and be flexible. You play for the long haul. So that's how you go about investing and it's really how you go about dealing with life, right? I mean, you have a lot of big investment decisions.

• 12:32Speaker 01

  I don't know if you have a time in your life where it was, you had to make a big decision, but how did you make it? Come up with the best choice you can and play for the long haul and then execute on it and then adapt and just go forward. That's about the only way you can deal with uncertainty. Managing uncertainty is really kind of the key to life and the key to investing. The people at first, they shrink away from uncertainty. We all do. I mean, it's natural. But you have to stop and think it's uncertainty that creates the opportunity in life and investing. If there were no uncertainty, then you couldn't have made any progress. That's the uncertainty that creates the opportunity and investing the same way.

• 13:10Speaker 01

  If there were no uncertainty, then things would be riskless and all investments would have the same return, the riskless rate. So it's the uncertainty that creates opportunity. So it's not about eliminating uncertainty. It's about managing uncertainty. So control what you can control and manage what you can't. That's basically the theme of the way we invest and the way I go through life, I guess.

• 13:33Speaker 00

  I asked this at the beginning of the conversation, but I had not met you and we had not talked before. But now we've talked a little bit and I'm starting to think about it even more. Did you have the same way about you at age 25, age 35, age 45? Where did you have this same composure?

• 13:51Speaker 01

  I've thought a lot about that and I think the answer is yes, it was in there. I just didn't, couldn't articulate it. I behaved as though I was that way. And as I've gotten older, I've realized what was going through my mind at the time.

• 14:03Speaker 00

  Meaning your appearance to the outside world was calm, but inside you were less calm. And as you got older, you're more calm.

• 14:11Speaker 01

  Yeah, probably inevitable. And maybe that's part of the book I want to share with people, the benefit of getting older and learning how to stay calm.

• 14:19Speaker 00

  But you talked about prediction. We can go flip on YouTube's, TikToks. Some people we've never heard of, some people are well-known names and their voices are loud. And it's, you can predict everything. And the average person, if they've got a choice and they hear David in a very calm way, I'm not trying to change you, but they hear David in a very calm way. But then they can flip on all the channels, CNBC in particular. It's a tough one for people because people I think are drawn to certainty, right? They're drawn to people that are certain about the markets. And if a very calm man enters the room and says, hey, it's not exactly how it works. I don't think it's ever going to change.

• 15:02Speaker 00

  I think this is going to be a dynamic in the markets and in people forever. It'd be a person over here saying, listen, you probably can't do what you think you can do. And somebody over here is going to say, oh no, you can do it. We can predict tomorrow.

• 15:14Speaker 01

  That's kind of dogma is something you have to, hopefully you have to loosen those shackles of that. And if, once you do, then you can go down a path that probably will make you more money and you'll feel a lot calmer about. See, all of this was brought about in the 1960s, really in seventies, when all of a sudden researchers had research quality data and computers big enough to process lots of amounts of data. And you could test the question, can people predict things? I mean, can people predict the market? In other words, are there managers out there, professional money managers that claim to be able to beat the market? Do they actually beat the market? And everybody can read that evidence. In social sciences, you rarely have proofs, you just from data, you just gain insights from data.

• 15:59Speaker 01

  But the data looked remarkably like the managers were kind of making random choices. And the number of managers that could beat the market were fewer than you would expect by chance. That called in the whole question of investing by trying to predict. Then the alternative then sprang up, well, what are you supposed to do if you can't predict? And that's really kind of the basis of our firm and my career, really, is trying to explore the best way to invest, given that you can't predict. And I would just caution your listeners that if the professional money managers don't seem to be able to beat the market, they don't have compelling evidence that they can, why would you think you can do it? So don't try to time short-term moves, but rather develop a long-term plan.

• 16:41Speaker 01

  Pay attention to what's going on because occasionally you do have to make changes. But usually the, the changes will be based on changes and what's happening in your life. I mean, over your lifetime, if you're getting ready to retire, maybe you wanted to change the way you invest. If you're starting out and want to save for college, that's suggested way to invest. All those things are really important and more important than your prediction of where the market's going.

• 17:05Speaker 00

  David, if I think about some of the names that investors, traders, they'll hear about Citadel and Renaissance Technologies and some of these companies that just supposedly can mint cash. You've had a long enough horizon to see this. And look, I have no doubt that these companies are doing, or they're making the money they say they are. How they're making it, I don't know exactly, perhaps many strategies. What is your perspective, given your strategy, when you see some of these companies that just produce insane returns above the market?

• 17:37Speaker 01

  That's kind of like the lure for sure. I start off with the basic principle, maybe they can do it, maybe they can't. I don't know. I don't have an opinion, but you don't need to have that. You don't need to find that person to have a good investment experience. You can go out and buy the market, say the stock market, free inexpensively. And that's tough for professional money managers to beat. Now, there'll always be people on the margin that can do better than that, end up doing better than that. But because there are too few of them, it's hard for us to say, do they get there by skill or luck? You can't really separate. I mean, and there may be some great managers out there that have poor performance due to bad luck. And so it's hard to separate skill from luck in this business, given the whole group of money managers that are out there.

• 18:22Speaker 01

  For most people, what it comes down to is start off with the basics. One of the things I'm really trying to do is get people to invest at all. There's still many people out there that don't invest and they should be. My parents, for example, never invested in public markets. And they didn't live with well in retirement, probably as they should have. But if people understood the beauty of public markets, then I think they could come up with sensible investment strategies. And once we get going, then you can consider things that are more esoteric Citadel or whatever. And I don't fault people, even though I'm totally persuaded I can't outguess the market, you know? So I don't make any bets on any of the individual stocks or whatever. But human nature is such that it's very difficult not to do that sort of thing.

• 19:05Speaker 01

  And so I tell people, go ahead, take a little bit of your money and try things like that if you find them attractive. But the bulk of your money, let's put in a sensible investment approach that over the long haul, I think it gives you a high chance of winning.

• 19:18Speaker 00

  I want to pick your mind for a moment on something very topical. Something that I had not really utilized at all until the last handful of years. Some of these large language models, some of these AI tools. And you mentioned some of the technology that was first coming on the scene in the sixties and seventies, the eighties, especially the personal computer on the desktop. So you've seen all kinds of shifts and each generation and each moment in time is going to feel like that technology they're in the middle of is changing everything. I mean, I kind of felt that when the dot com era happened. I do feel like it's happening again in my own life. But when you look at just the pure technology of it, not even getting into the investment ideas.

• 20:04Speaker 00

  When you look at tools, some of these AI tools and given your career, the length of your career, what you've been exposed to, how do you think about these tools? They seem amazing to me in some ways. In other ways, they're not amazing, but it is an amazing piece of technology.

• 20:18Speaker 01

  It'll speed everything up for sure. The stock market, we think of it as a giant information processing machine. When as new information comes in, prices reflect that information. And with AI, I mean, there's going to be a lot of competing AI algorithms out there for sure. But I mean, prices ought to move to their equilibrium levels even faster than they did in the past. From a stock market standpoint or a bond market, I think AI is going to be, it'll have a positive impact. I don't think, I don't think it won't help professional money managers to outguess the market any better than they did in the past because your AI algorithm is going to have to be faster than somebody else's AI algorithm if you want to make money off of that. So that's, we're back into the same conundrum we started with.

• 21:02Speaker 01

  And as a result, it's very difficult to beat the market.

• 21:05Speaker 00

  How much of your world, going back to inception, and maybe there's a story or a nugget that you can connect to this, but how much of your world do you see through the scientific method? All of it?

• 21:15Speaker 01

  It's a great place to start. The thing about science and particularly in doing research on investments is you're testing models all the time. People will come up with new models and they're testing. And at the end of the day, it's very difficult to separate the results. It's difficult to separate how much of the results are due to what you can't predict or how much of it is due to the fact your model is not very good. You just can't separate out the model uncertainty in the model versus the uncertainty that it doesn't explain. The model doesn't explain. So that's a long way to get around to, I think you want to have science in your hip pocket always as kind of your first principle to rely on. And then if you want to deviate from what science says, you know, have a rationale for deviating from that science.

• 22:01Speaker 01

  Or stated differently, the parallel might draw to the field of medicine. Let's say all doctors go to the same schools. I mean, study the same textbooks. At the end of the day, some doctors just turn out to be better than other doctors. So they're using the same science, they just apply it differently. And I think that's really where I am on the science. I think we want to make sure we're applying science as well as can be applied and then execute on that in the best way possible. Or Myron Scholes says, ideas are cheap, execution is everything. The ideas come from science, but then you still have to execute. That's where I come out on how I deal with science.

• 22:37Speaker 00

  I know in your life, Eugene Fama, you mentioned earlier, a big influence in your life. I don't know if I'm saying this correctly, but perhaps the reason that you went the direction that you went or a strong part of it. How do you see his work, your perspective? And then in the last, let's say 25, 30 years, the advent of the behavioral side of things, Daniel Kahneman, Schiller, for me as an outsider, it sometimes looks like it's Nobel Prize winners in economics with competing perspectives.

• 23:07Speaker 01

  I don't think they're competing. First off, I think the Kahneman book, Think Fast, Think Slow is one of the all time great books.

• 23:13Speaker 00

  I had a chance to interview him years ago.

• 23:15Speaker 01

  Oh, okay. I never got to know him, but I know most of the well-known behavioral economists now. And all that stuff is really interesting. The question is, how does it apply to investing? Basically, behavioral people can point out that people aren't always consistent in their decision-making. They make kind of funny leaps in thinking. And that's true. When they point out some of the examples in the book, I go, yeah, that kind of explains me. All right. The leap though then is because people, one hypothesis is that because people are irrational, it must mean that stock prices are irrational. And they've never been able to develop a theory or explain why that would happen. So I think Fama's rejoinder and I'm on his side is look, until we have a model of how

• 23:58Speaker 01

  behavioral economics impact stock prices, just have to assume those are just additional factors that already get adjusted in stock prices. If you look long-term study of stock returns, and now we have a hundred years of research quality data in the US, the crisp data and have stocks and bond returns. And to me, what I think that jumps out is markets behave kind of way we hoped they would. Stocks have higher returns and bonds will return over inflation. It's all pretty sensible. Stocks over the long haul have about a 10% return. This is over a hundred years. This is a data that starts with the Great Depression, goes through World War II, Korean War, the Great Recession, yet a high inflation loan.

• 24:40Speaker 01

  It's a pretty good test environment for how things work and they kind of work the way we hope. So yeah, people have a lot of inconsistencies out there for sure. But what comes up, there seems to be an order that comes out of that chaos that's once it goes through the market mechanism.

• 24:56Speaker 00

  I know I'm jumping you around a little bit, but it's an interesting time to pick your mind. Essentially, you're an entrepreneur, right? I mean, that you started your business, it took off. Did you have an early entrepreneurial influence? Or did you just spot the opportunity and jump?

• 25:13Speaker 01

  It's funny, I never wanted to be an entrepreneur. I was working at a big company and I kind of enjoyed the idea. You can have an assistant and you can take vacations and travel around and go home and on weekends, not think about too many things. That was a great lifestyle, but the idea we had to start the firm, which is this, we thought we could apply science, we could get people excited about the new science and it was worth fighting for. And so I don't think I was an entrepreneur as much as it was a zealot of saying, look, there are these new ideas, there's this new research out there and you got to be aware of it. That was so exciting to be part of that.

• 25:49Speaker 00

  So I knew I wanted to be an entrepreneur before I had the opportunity, before I had the idea. It sounds like you're making the case that you're going along this life kind of, hey, I'm just going to be, you said I didn't want to be a professor, but working for someone, perhaps a large company, and it was spotting the opportunity that converted you.

• 26:07Speaker 01

  It was now or never. If it's something I really want to do and my company didn't want to do it, then I go, okay, what the hell?

• 26:12Speaker 00

  To frame it like you just framed it, there must be some people that didn't come along for the David ride, that they missed the ride. I'm not saying this in kind of a mean or negative way. I mean, I think about the guy that started Apple with Jobs and Wozniak and then sold out really early. Have you ever had people come back to you and say, oh my gosh, you saw something, I just didn't see it?

• 26:34Speaker 01

  Not everybody we started with last, almost everybody did. But we had one of our key partners left after a few years. But you know what? I think that's one of the principles of business though. You start a firm around somebody's vision. Nobody has the vision quite as much as the original visionary. And so it's hard for people to really believe it down, your vision down to their tippy toes. And so some people drift away. It's further complicated by the fact that your vision, there's no guarantee that you had the right vision. I mean, if it turns out you're successful, then yeah, the vision was right. But I mean, a lot of people that have equally confident about their visions, it don't turn out so well. In fact, most startups fail over time.

• 27:13Speaker 00

  That also comes back though, to the idea, the business plan, right? A lot of people, maybe they throw an idea out there, they give it a half-hearted try. So there's going to be some people out there that perhaps as good idea and maybe a different business or something, as good idea as you, and they didn't make it.

• 27:28Speaker 01

  If you want to be an entrepreneur, you got to leave it down to your tippy toes. You yourself can't have self doubt. I think you increase the chances you'll fail. I mean, for example, not everything started off beautifully. It wasn't violins and so forth accompanying our start. So we started with a small cap idea. While it turns out, we happened to start at the beginning of the worst nine-year run for small stocks relative to large stocks. If you look at the seven and a half year period ending in 1990, the S and P 500 compounded at 14% a year and our small cap portfolio compounded at 2% a year. So here we have a new idea brought on by a hundred percent of our track record. Basically, when we started was really disappointing. Yet we built a business around that.

• 28:13Speaker 01

  It takes a lot of resolve and well, it takes a good idea and well executed. But when you start off and your performance is so disappointing, it's very difficult to keep going if you're not a strong believer.

• 28:25Speaker 00

  Given, starting 1981, the very high interest rates at that time, big events happening in 1987, the early 90s, there was trouble, long-term capital 98, NASDAQ going up 100% in 99, 2002, the NASDAQ's down 77%, I think. Then we get to the Great Recession, we get this long stretch of zerp, zero interest rates. We get into COVID. Is any of this stuff connected? I guess what I'm really asking you is, do you allow yourself, or does it even matter in your world, to have political or just views about the Fed's activities, given your strategy? Does it really make a difference?

• 29:08Speaker 01

  It may make a difference, but the question is, can you act on it? I mean, the market moves so quickly. By the time you even hear the news about what the Fed's doing, the market's already reacted to it because of people there, right there at the conference. I don't think it makes sense to try to act on that kind of information. I'll point out through, you kind of outlined, from 1981 on, there've been a number of disasters and sources of tension. And the return on the S and P 500, let's say, and small companies has been over 11% a year. If you put $1,000 in the S and P in 1981, it'd be worth over $100,000 today. And that's how markets work. Markets are processing information, always with the idea that by the end of the day,

• 29:51Speaker 01

  you always ought to have a positive expected return for the next day. Even though it's only positive about half of the time. If people didn't have the feeling they're going to get a positive expected outcome, they wouldn't invest. You go back to the fundamentals of trading, what's going on. You have buyers and sellers coming together, and they don't trade unless each side thinks they got a good deal. And these days, I think people really setting price, people on both sides of the trades, the way to think about it is they're really large sophisticated institutions on both sides of the trade. And what pops out of that is fair prices. And throughout the day, prices are being adjusted to reflect the new information coming in. And you've got great minds, you know, duking it out. In some ways, that's the beauty of markets.

• 30:36Speaker 01

  The market's working for you. You don't have to. You can sit there and watch the fight going on and feel that the result is something that's really fair to you. Many people, like my parents, thought of themselves as outsiders.

• 30:47Speaker 00

  When you use the term, what do you mean by the term?

• 30:50Speaker 01

  By that term outsider? I mean, the way my parents kind of thought about it is that insiders kind of make all the money, and outsiders coming along, like them, people that aren't in the business, they're just going to get taken advantage of by the insiders. Well, the good news is, the insiders don't seem to be able to beat the market, and you can buy the market yourself. That's good news. Even though you're an outsider, you don't have to feel like you're being taken advantage of. That is kind of the breakthrough in a way. If my parents had understood that early on, they realized that over the long haul, if they'd put their money in, well, actually, I did the study. Funny thing happened. When my parents passed away, I went down to their sit lock, opened their safety deposit box, and inside was $15,000 in cash.

• 31:35Speaker 01

  You have to understand, I sold their house for $54,000. I mean, what were they doing? But you can understand, they grew up during the Depression, fought in World War II. I said, well, if we're taking that $15,000, when my dad came back from World War II in 45, by 40 years later in 85, if they got the market return, what would it be worth? If they got the market return on $15,000, it'd be worth over $1 million. I mean, how cool is that? The story even gets better, I think. So I'll go, this was last year, so that was 40 years after this event, finding the $15,000. What would have happened if we put $15,000 the next 40 years? If you got the stock market return, you would have gotten over $1 million. So that's the magic of compounding, really, and the importance of playing for the long

• 32:20Speaker 01

  haul, and the excitement people should feel about investing, and why, even though they're outsiders, they can feel like they can get a fair return.

• 32:28Speaker 00

  At this point in your life, you could be considered the consummate insider, though.

• 32:32Speaker 01

  I worry about that. I worry about that. I think the outsider insider, it's not so much where you stand, but how you think. And as long as you're always willing to challenge your assumptions, then you're an outsider. To me, insiders are people that are rigid in their thinking and won't adapt and are inflexible. I hope that never applies to me.

• 32:50Speaker 00

  You just made the interesting case about the different time periods and how the $15,000 would still holding the market grown to over $1 million. And I can't cite these statistics off the top of my head, but like, if we were to compare right now, the baby boomer generation, your generation, and Gen Z, kids in their 20s today, there's quite a discrepancy on many factors. The younger people not getting married at the same rates, house ownership way down, wealth way down. So I don't think anybody would argue with you about the case that you just made. Because, look, every generation has faced, you know, coming out of World War II, that those generations were facing something that kids today don't face, right? So every generation faces something different. But the wealth disparities do seem to be kind of inherent, perhaps all kinds of reasons.

• 33:35Speaker 00

  Given your perspective, what positive feedback, inspiration would you be offering to the 20-something group today that feels like, man, the boomers and Gen X and maybe even millennials, they've got such a head start on us, and my gosh, a new house, and my family's from Northern Virginia outside DC. A new house costs $3 million now. It was, in the 90s, it was a couple hundred thousand. What kind of inspiration would you give the young people today that might feel like the tables have been turned on them some?

• 34:08Speaker 01

  This eventually kind of ties into a question that quite a lot of stocks have had a 10% return. And a big factor to me is boils down to human ingenuity, that it ties into an economy. And even at base level, I make one fundamental assumption, behavioral assumption, if you will, that people want to improve their lives. And when they go to work at a firm, they want to make their lives better. The story there is that in 2020, in the middle of the pandemic, as it's just really hit, and the market's down 30%, people were pulling their, what do we do? I said, I can't predict what's going to happen. I don't think anybody can. But here's what I believe, is that people aren't going to sit there and take it.

• 34:51Speaker 01

  They'll adapt and be flexible, and when they go to work, they'll figure out new things to do to get back on track. That's human behavior. That's an energy that gets released. I said, you know, I wouldn't be surprised if we get back on track faster than you might expect. And that's what happened. I mean, the recession was only one quarter. That's the optimism that comes out about understanding markets. So I would tell young people the same way today. I don't know where things are headed, but I do believe people will always try to make their lives better. Now, looking at generational thing, when you were talking about it, kind of prompted my memory, when I came out of school, I mean, the older generations thought we were all crazy, running around yippies and yuppies and whatever.

• 35:30Speaker 00

  Hold on, I don't think you were ever a hippie. I'm going to make a bet right now, I don't think that was ever the case.

• 35:35Speaker 01

  I wasn't part of it. You know, I do suffer.

• 35:38Speaker 00

  Am I right?

• 35:39Speaker 01

  Yeah, you're right.

• 35:40Speaker 00

  Okay.

• 35:40Speaker 01

  But there was an expression that went around at the time, if you remember the 60s, you weren't part of it. To your point, I remember the 60s. But nevertheless, our generation was kind of frowned upon by a lot of older people. So I think that's kind of human nature as well. But if you study the history of the development of economics and the history of investments, you'll be very optimistic about investing in public markets. And that, like I say, this going back to the 100 years of returns, the amount of anxiety and stress we face today, is it greater than it was in the Great Depression or at the beginning of World War II, when it looked like we were losing, or all these other periods of time? I mean, those histories characterized by a lot of ups and downs, and humans pulling

• 36:25Speaker 01

  together, maybe this is a behavioral thing, figure out how to get back on track and adapt and be flexible, and then it makes life better for everyone. So some people accuse me of being an optimist. I prefer to say, I'm a realist. I think that's just the way life works.

• 36:41Speaker 00

  I have a nephew, he just got his degree at the University of Virginia, spent four years on the football team, didn't really get any playing time, defensive back, but he has a fifth year, and his fifth year, he's down at LSU now. So we'll see if he can get some playing time at LSU. But the reason I bring that up is because I've read some things about you, and you seem to be a very big proponent of supporting sports, in particular at your alma mater, correct?

• 37:06Speaker 01

  Yeah, I think the US has an unusual model for college sports. I mean, unlike any other country in the world I know of, really. And it's really important, in a school like the University of Kansas I went to, sports are incredibly important. So I'm trying to do my part to help them, keep them competitive.

• 37:22Speaker 00

  Are you looking at something like Indiana and saying, hey, hold on, why can't we do this at Kansas?

• 37:27Speaker 01

  That was pretty aggressive. I mean, I don't know if we can do something like it. I don't think it's important that Kansas has become the best football and basketball.

• 37:34Speaker 00

  Basketball's pretty good.

• 37:35Speaker 01

  Well, it is true. I would like them to be. It's important that they be the best, okay. But, you know, but also, I went to the University of Chicago. When I was there, they hadn't had a football team in 34 years. And so that's the other end of sports. Some schools, sports are really important, other schools, it's not, and both those models are fine. But I grew up, my hometown is Lawrence, Kansas, where the university is. That's, I did my undergraduate there and a year of grad school, and my relatives are all there. So it's really important to me that the community thrive. If you look at the data, there's just a strong correlation between success in sports and next year's application pool.

• 38:15Speaker 00

  Interesting. You're saying, at least from your perspective, as a CEO for a long time, chairman now, you're saying, hey, hold on, I like to meet young people that have got sports in their background. It tells me something. Is that what you're saying?

• 38:30Speaker 01

  Yeah. And in terms of management of the company, I think one of the things, we want bright, talented people that want to work our, I mean, but we don't have problems attracting that. In some ways, the big concern is always, do we have team players? And if you have bright, talented people that are team players, then you really have something. And so when we interview people and they have a sports background, that's a plus because they've had the experience of working as a team.

• 38:54Speaker 00

  A last question here. Is there anything today that you wanted to talk about that I've not brought up that you wanted to share, anything in particular? I've kind of bounced you around a lot, which is my intention. Did I surprise you with my bouncing around? Were you expecting? You did not know what I was going to give you.

• 39:08Speaker 01

  It was unexpected. It was kind of really fun. And I think you asked a great question. I mean, I like the fact they jumped around. What I don't like is you have a list of questions and you're just going to blast through them.

• 39:18Speaker 00

  I don't have a list. I don't have a list, David.

• 39:20Speaker 01

  Yeah. And the purpose of doing the book was to make people feel better about the prospects of investing and that they can feel better about the chance that long-term they're going to be okay financially. And public markets offer a great avenue for people. If they stay consistent, have a reasonable portfolios, adjust to what's going on, over time, there's no reason why they can't succeed. So I want to deliver that uplifting message. Maybe it's for your Gen Z kids or whoever.

• 39:51Speaker 00

  Anybody that has still got some gray matter up there moving around says themselves, okay, I don't know about David yet, and now I know something. And he's got an interesting story. Well, some nice success. And I think people want to say, well, what can I take from this man? For me personally, what I take, and you can hear in my voice, I'm probably strung a little bit higher than you.

• 40:14Speaker 01

  Undoubtedly. That's not saying much because almost everybody's strung a little higher than I am. So, okay.

• 40:19Speaker 00

  But it does make me smile to have this conversation with you and see you the whole time and see your book image. Like literally, it says, stay calm at the same level of your eyes. So for, for an hour, I could, not only are you completely calm, but there's the book title reminding me that you're staying calm. It's great stuff. Hey, the book is called Stay Calm: Learn to Embrace Uncertainty in Investing in Life, David Booth. People can find the book anywhere and everywhere. Is there a place you might like to send people? You probably not want rock star fans or anything. So I guess the way I'll say it is this, if people are smart enough to find you and ask you a question, I think you would probably answer their question. But that's kind of a riddle in itself, isn't it?

• 41:03Speaker 01

  We can figure out how to get back to them. And all I can say is that the book was something that's really important to me. I'm glad I was able to express all the things I've been kind of thinking about over a long period of time.

• 41:15Speaker 00

  Your first book, right? Your first book?

• 41:17Speaker 01

  Yeah, and my last. One of the things that's been great to hear from people coming in saying, I love the book and I'd like to give it to my kids. That's, to me, that's been kind of the best feedback I've had.

• 41:28Speaker 00

  The thing with you that I can see, again, we started talking and I was immediately like, oh my gosh, I can see why this man chose the word calm. And I think it's a really nice way that you have got a title that is you.

• 41:41Speaker 01

  Yeah, no, I think it kind of came up spontaneously, the title, but it really does nail me. And once people hear the title, they go, and they know me a little, they go, yeah, that makes a lot of sense.

• 41:52Speaker 00

  David, I appreciate your time today.

• 41:54Speaker 01

  Okay, great. Thank you so much. I enjoyed it.

• 42:01Speaker 02

  I see a time when those awake will understand how to make money in up, down, and surprise markets. Whether a new trader or experienced, college student or financial advisor, protecting against a crash or just trying to make a lot of money, trend following offers everyone an answer in uncertain times. To get started immediately, send me an email, [email protected]. I will send you the right trend following steps to take, along with my free video. But if you want to buy and hold, trust the government and trust Wall Street, this is absolutely not for you.