Lessons in Life and Investing with David Booth

"You Know More About Investing Than You Think You Do, And It's Because You've Lived Your Life." Title of the essay by David Booth. And that's what we're gonna be discussing today. David, as always, it's great to have you here in studio. Well, thanks for having me. I admire so much what you do, and trying to help people understand better how markets work. Well, I feel the same way about you, and I'm excited to talk about this essay because I do feel like with money, sometimes there's a little bit of an intimidation factor. And one of the things that this does, and I think you're working on, is how do you make people feel better about their wealth? Well, that's right, and the key to it is, of course, understanding better how things work, and also learning how to tune out the noise. Yeah, that's a huge part of it. And there's a lot of noise out there. There's a lot of noise, I mean, financial services industry has been large over the years, mainly driven by product salespeople pushing product down your throat. Yeah. And they can be very intimidating, you know, if you don't have a firm grasp on how markets work, and why you're doing what you do. Well, and it's important, 'cause everybody has to deal with money in their life. Every single day. Yeah. And that's, when you get to be my age, what you want to do is look back and think somehow you helped a bit. Mm-hmm, yeah. And I think, I'm so pleased with our firm now, 44 years, you know, and the ideas around which we built the firm, these ideas have been going on for over 50 years now, it's had a huge beneficial impact for individual investors. People are getting a much better deal today than when I started back in 1971. Well, and we'll go in and we'll unpack some of those ideas throughout our broadcast, but you know, you think about that, you go to Chicago, '69, is that right? When you went to University of Chicago? Right. Good experience. 1969. Yeah. I wasn't gonna say 18, David. Okay. So, you go to the University of Chicago, 1969, and I mean, one, I guess, why'd you go there? Well, I mean, there's a revolution in finance taking place, and one of the epicenters was the University of Chicago. And a professor of mine at the University of Kansas said, "If you are interested in finance, you need to go to Chicago." So, I decided I wanted to be a finance professor, and I headed to Chicago. So you go to Chicago, technical training, you get into the investment business, you're there at the creation of some of the first index funds in the 1970s. Amazing, early '80s, you go and you launch Dimensional. And all of this is research-based. It's technical, it's data. But now I think about what you're doing, and everything's around communication. Right, well, totally. I mean, these ideas are, at this stage, most of 'em are really not challenged that much. Take the notion of market efficiency. Well, most people accept that trying to out-guess the market is a waste of time. And furthermore, you don't have to do that in order to have a good experience. That idea, or those two ideas, you know, are generally accepted now. And that's a far cry from when I got into the business. It's really a positive message. You and I were chatting a couple of days ago, and you said, "We want to turn the light on for people." What'd you mean by that? Well, we wanna have people feel comfortable about investing. I think what I would say really about why we're also upbeat about markets and investing, 'cause markets appear to work the way we hoped they would. You know, there's a sensible relation that emerges over time in various asset categories. You know, for example, stocks in the US over, historically, they've done 10 or 11% of the year. That seems to be a fair return to the investor. And for companies issuing capital, that seems to be a fair cost of capital, to me. I mean, there's no theory this says what the optimal cost of capital should be, but that seems to be reasonable. You know, bonds have a lower return and are less risky. And then, and fixed income investments, money market funds have a tendency to cover inflation. So those are all kind of sensible relations. So the question then is how do we help people turn on the light? It all sounds so confusing. You know, investing sounds so complex and uncertain, which is true. It is complex and uncertain, and so is life. Yeah. You know? Yeah. You know, so that's what I've been working on, is trying to help people connect the relation between investing and other parts of their life, which is largely about managing uncertainty. Yeah, it's interesting. And it's all, I mean, it's really... It's an exercise in communication, which to me is interesting, coming from someone who is trained at University of Chicago under Professor Fama, knows all the technical details, but you're spending all your time really these days on the communication side. That's right, I mean, it occurred to me that, you know, for 50 years, I tried to explain investing the same way I learned it, which appeals to a small fraction of the population. Yeah. And if we really want to help people, and we want to change the world, you know, we have to make it, you know, all these ideas, be able to express them in the language that people like you, ordinary people, use, rather than, you know, that here's the R-Square or the linear regression. Not a lot of people understand that, and they can't connect with it. They can't connect with it. I love this essay you've written, and that was the title of it that I kicked off with. "You know more about investing than you think you do." And I want to go through some of the concepts that we have in here, because I think what it's gonna do is allow people to say, "Hey, I actually understand what's going on there because I've lived my life and I've thought about it in the context of my life experiences." And to your point, it carries over directly to investing. So, one of the things I wanna start with is this idea of uncertainty. And I think when people hear the term uncertainty, they draw back a little bit. They get like almost like a fear response, but you've really flipped it on your head. And one of the points you put in here is "That uncertainty creates opportunity." Again, it's a very positive message. Well, I mean, that's right, and sometimes I say "Uncertainty is underrated." Yeah. People think, "Don't you mean overrated?" "No, I mean, underrated." You know, and the reason I say that is the uncertainty leads to opportunity. Just think about it in life, everything been pre-ordained when you were born. Right. You know, probably turned out to be a pretty dull life. You know, the issue is not about eliminating uncertainty, it's about managing uncertainty. Yeah. And so, and that basically involves making, you know, the best choices you can under uncertainty. You know, and that's really the field of economics. That's really what I studied, so that's the connection. So how do we help people make decisions about investing? And maybe some of those principles that they learn about investing can apply to life in general, or vice versa. When you really break it down, right, you're just, every day in your life, you're kind of making decisions that put the odds in your favor. And we've talked a lot about the connection between health and wealth, you know, and if you think about health, really, right? I mean, if you don't drink, you don't smoke, you exercise, you get your sleep, you do all the things, you're not guaranteed to live a long life. You're making decisions that put the odds in your favor. And with investing, it's really that's all that you can do. Well, that's right, and turning around, you know, the same people that say, "Oh, I'm afraid to invest," you know, they go to a doctor, and they go to, and there's nothing much more uncertain than your, you know, where your health is gonna take, you know? Right. I mean, it's... So you do the best you can, so the people feel comfortable going to a doctor and taking the judgment of the doctor. Yeah. 'Cause they know more about whatever their issue is than they know. Yeah, when it comes to investing, you know, they think somehow, they have to make... They have to be the expert. Oh, this is a great way to think about this. Yeah. Yeah. So, you know, in both cases, what you want are the people that you can trust to help you with advice. Mm-hmm. You know, advice comes in many forms, and it's all part of your lifestyle. You get advice from a doctor, you get advice from the chef, you know, at a restaurant, here's how you do this or that. Yeah. You know, advice. And yet, when people think about investing, sometimes they think, "You know, I don't need anybody else's help. I need to figure this all out on my own." You know, that's kind of... Most people don't feel comfortable self-medicating on big issues, you know? Yeah, that's right, now you have to, with your health, and even in your chef example, right, Like, you need to know enough about your taste, your preferences with your health. You need to know kind of what's going on with your body, what you're trying to accomplish, where you're at, and all those things. But it does get to that point where it's okay to bring in some advice, to bring in some help. And when you put that combination together, that's when you can have real success. Well, I think that's right. I mean, if I kind of have a paper cut on my finger, I'm not gonna go to the doctor for that. You got that one covered. I got that one covered. So, but it's on issues that are really complex and highly uncertain, and where the outcome is really important. You know, those are the kind of things that you may wanna- Yeah. Sit back and get some advice, you know? Right, right. The other thing about advice is the things in investing, the number of issues you need to consider are just, they're incredibly large in number. Yeah. You know, they're, in terms of skills that you need, the functionalities you need to invest, you know, things like insurance and estate planning and taxes, and you know, where, how much salary you make, and all these, you know, you can't be experts in it. Nobody can be an expert in all the fields. Yeah. So that's, you know, having people that can help you pull all these things together can be very valuable. Yeah, I believe that. It's interesting, that really starts to get at this sort of the intimidation factor of money. And what I find sometimes, is that, as people's lives become a little bit more complicated and they have more needs with their wealth and with their money, sometimes people almost put their head in the sand because of that intimidation factor, right? Right, well, no, that's right. And yet, they wouldn't hesitate if a doctor gives them a prescription, they go, "Okay, I don't understand, you know, all the chemical reactions in here. But I'll try it, see how it works." It's interesting, your body's kind of telling you stuff, and so then you go to the doctor, right? And so, how do you kind of have that perspective with your money and with your wealth to say, "I understand enough, but now maybe I need to go get a little help." Well, you know, your body is always moving kind of towards equilibrium if you have a cut, it tries to heal it itself. Yeah. Yeah. And sometimes there are problems that are too severe that your body can't handle, but by and large, it does an amazing job of moving towards a positive outcome, which is, in my view, the way stock and bond markets work as well. Yeah, that's good. You said something a couple of minutes ago, which I really like, which is, "Evaluate the quality of your decisions and not so much the outcome." And is that because there's, no matter what, there's kind of a randomness to life, and all you can do is have the best inputs? Well, that's what we mean by uncertainty. Yeah. If you always got... If you always won, then it isn't uncertain. Right, yeah. You know, and so it's... But here, again, let's talk about moving from life right into investing. I think the worst stock year for the stock market was down in the depression. Something like 40% or something. Okay, well, for a lot of people, losing 40% in one year would be a catastrophe. Right. So there's ways of dealing with that. Number one. Yeah. Maybe put half your money in stocks. Yep. Something in- Yeah. Right? So you can deal with it that way. And that's the beauty of markets that we don't even have in personal life so much. If you look at individual stocks, for example, they can go to zero. The stock market is not going to zero. You know, it's- If the stock market goes to zero, we may have bigger problems. Yeah, yeah, yeah. Well, that's what would make it go to zero if you have some sort of severe problems. Anyway, those are kind of little things for people to chew on to help 'em feel more comfortable. But the underlying theme of this no whole notion of Famas of market efficiency, you know, it applies a lot of different ways, but it's, the research indicates that everybody can have a good experience 'cause people, everybody can buy market portfolios. Yeah. You know, and it's... And if, you know, you choose your market portfolio you want and don't invest, you know, figure out the ratio of risky to riskless assets, there you are. Yeah. It is interesting, though, coming back to some of your points that you make in this. I mean, do you feel that your objective, Dimensional's objective, I mean, it's coming back to turning the light onto people that if they understand some of these concepts, it gets away from being sold a product that may not be the best for them, fighting against the market, doing all of these things that we would say probably take you away from a good investment experience. Well, I mean, that's right. I mean, look, the reality is, it's very difficult to find a 10-year period where stocks lost money. Yeah. Stock market, individual stocks, here again, can be all over the lot. But focusing on market portfolios, which is what we do, you just can't. There aren't any disaster scenarios for the stock market. Now we've had disaster scenarios, you know, a couple of world wars and rapid inflation, deflation, the financial crisis, you know, COVID, and that's all in the data. Yeah. I mean, it's a miracle. Right. So, I think of the stock market as being one of the, maybe the eighth wonder of the world, you know, where you have millions of investors coming to the marketplace every day on the buy side and sell side. Very sophisticated people on both sides. And these very sophisticated people, they don't trade unless they think they got a good deal. And as a result, you know, prices have to settle at fair levels, at fair prices, they don't have to. That's an empirical question. The market behaves as though they do. Yeah. I feel like, you know, I've been at Dimensional 15 years, and I feel that when you really start to embrace some of these principles that we're talking about, some of the things you wrote about in here, embrace uncertainty, flexibility, adds value, tune out the noise. It's almost like you sit above all of this chaos that everybody else worries about. It doesn't mean that you're not a citizen of the world and you're not thinking about it, but when it comes to your money, it almost feels, you sit above it in terms of a worry. Well, yeah, just go back to a medical example. You have a problem, you know, you have some sort of headache or whatever, the doctor figures out what the problem is and gives you some pills or whatever. You solve the problem, all of a sudden, you feel a little more relaxed. Before, you had a lot of anxiety. Now you have, once you get the pills, even before it works, you start feeling better 'cause you know, you've done everything you can. You had expert opinion tell you, "Here's what the answer is." So, and once that happens, the big part of the benefit you get right away, even before the medicine kicks in. Oh, yeah, the sort of the mental, the emotional- You know, you're right. And that's what we're really talking about. Are you saying above the fray, once you understand that markets, here's based on 100 years of data in the stock and bond markets. We can't tell you what's gonna happen tomorrow, but we have a strong belief in over the long haul that prices will get in a way that you'll get a fair return for the level of risk taken as long as you have well-diversified, low-cost portfolios. A couple of things that you can control, you focus on. But you know, going back to your long-term example there of we've lived through a lot of conflicts, a lot of wars, inflation, deflation, technological advancements. It really is those people that do flip it on its head and embrace uncertainty that have done well as investors. Well, that's right. I mean, I take great comfort. You know, I don't try to out-guess the market. Right. And there's no evidence people can time short-term moves in the market. And so, I like the idea that everybody in the market, stock market is working for me. Yeah. I mean, they're out there, everybody's negotiating. And what comes out that, our prices are all accept. Yeah. I go, "Well, that's a heck of a deal." That's a heck of a deal, everybody's working for you. And also, you've made this concept of the beauty of public markets. And I love when you say that, what do you mean by the beauty of public markets? Well, it's just that, I mean, in private markets, like, well, I mean I'm not complaining about private markets. Dimensional is a private. Right, it's a good example, yeah. Yeah, so, but think about buying a house. It can be stressful. You have Zillow and things that give you an idea, rough idea of what the house is worth, but you don't really know what's behind the walls, and so forth. And you negotiate a price, and you don't know if that price is too high or too low. You just do the best you can. Well, I take great comfort in the wisdom of crowds in the stock market with, where everybody has similar information. You know, and there's lots of trading volume. I think that it's unlikely that prices can be too far away from fair values. It's almost like you've got this partner in the markets that's working for you as your journey through life. Yeah, I mean, that's really what I try to get people to convince people of. And that's a tough sell. 'Cause day-to-day, the markets look chaotic. It looks like it's all chaos. And to say no, well, I know what it looks like. And day-to-day, that's probably the best description is chaos. But in underlying that is an order that comes out over the long haul. There are two parts of the story, really. One is that this is how markets work. And two is, convince people, if you can accept that, then your life will change for the better. And when you go home at night, instead of tuning in on some financial show, you can play with your kids a bit more 'cause you know, you've done everything you can. You've worked with an advisor, say, and got a sensible portfolio put together that you think is reasonable. And you know there are gonna be ups and downs, but you've done everything you can. That's all you can do. That's all you can do in life. That's all you can do with investing. And it's a very liberating feeling when you realize that a lot of these things that maybe you have been stressing out about around your money, you don't have to. Yeah, right. Like, I've often thought about that in parenting. You know? People often try to give you advice on how to deal with a two-year-old. I go, "Man, you've never had a two-year-old. If you think you have any control over that, yeah, you know?" That's a lot harder than being a successful investor. Yeah, so con control what you can control. You can't control the two-year-old behavior. You can't control the stock market. Yeah. But you can control how much risk you take in the market. I love that. David, bigger purpose for Dimensional, I mean like, what do we stand? What do you hope for? What do we stand for? Well, it's what we've always stood for. And even going back to what, when the light was turned on for me in Fama's class, my very first class in Chicago was in Fama's class. And you learn from all this research is, they have a deep understanding of how markets work so that people can make better informed choices. That's the objective of the research. And sitting there, I realized, hey, look, it's great that all these academics are doing this great research, and it's really important, but if nobody uses it, it's not important. So it takes a team here, it takes people doing good research and it takes a firm like ours to implement those ideas, and implement them well. You know, just because you're good at research doesn't mean you'd be good at managing money. 'Cause there's a lot of things that can go wrong between, you know, the blackboard and your portfolio. Well, and I've heard you say that before, that you know, you think about like medical school, and a lot of the doctors study the same medical books, but some are just better doctors. Some are just better doctors. At the end of the day, it's about execution. Yeah. The ideas that around which we built the firm are pretty much in the public domain. Right. I think we interpret them better then, and with that, with our access to these leading academics. Can't imagine anybody can interpret the data any better than we do. And if somebody did and came up with an idea that was even better, we'd use it. We're not wedded to any particular idea. We're wedded to the idea that we'll do what's best based on the information. Yeah. We have, that's available. And so that's... So, our objective is to make people's lives better. That sounds corny, but if we have these ideas, if we can help people understand these ideas better, then they can end up with a better informed choices, and you know, a better long-term experience. And I think that's what it's about. And I think the title of your article just sums it up perfectly. Again, "You know more about investing than you think you do," and this is also part of a whole series of essays you've been putting out around "Life, Invested." Right. Yeah, and one of the principles is, you know, "plan, don't predict is the idea. Yeah. Most people, you could have known 30 years ago where you'd be today, or where you'll be 30 years from now. So it's not about predicting. That's not the way you evolve through life. It's coming up with a sensible solution for whatever it is you're doing, and then pay attention and look at the results. Sometimes it works out really well. So not, sometimes that doesn't work out well, and adapt to it, be flexible, rethink, you know, your situation, you know? And as you go through life, you'll have any number of transitional moments, you know, from getting out of school to, you know, starting a family or whatever, to retiring, and all those, every step along the way, you need to think through all these issues, and the solution you come up with today may not be the solution you come up with in investing 30 years from now, but that's okay. You know, but if you make well-informed choices all along the way, the thing about uncertain, you know, you're probably gonna be okay. The thing about uncertainty is, you know, we like to think of as half the time, you win, half the time, you lose on things. Now, in life, you can handicap it, you can be better than that. I mean, going to college, you're probably gonna be better off than if you didn't go to college. So, but... So you can have a bias in your favor. So, and you don't wanna, we're not saying you can't try to predict anything. You know, if you order a sandwich at the sandwich shop, you can predict probably, if you've been there before, roughly how good it's gonna be. Sometimes you're disappointed. But it's about, you know, coming up with the best solutions, the best plan you can, then it's about implementation of that plan. And that's where we come in. There are things we can do as a professional investor that individuals can't do on their own. I mean, we have a couple of 100 people, you know, executing portfolio trades every day for, you know, it's very complicated, sophisticated stuff. And, you know, we can, you know, individual trades, we can do a little better than you can probably do on your own. And that adds up over time. I like what you're talking about here, because, to me, what you're really describing is this idea of journey versus destination and life, And I love, I mean, all of your concepts just string together, which is there's gonna be uncertainty, right? Plan for it, but don't try to predict it. Along the way, be flexible. Control what you can control. And then, also along the way, learn to tune out the noise. And this is like this investment journey and this life journey that you're going down. I guess, noise, to me, is investment noise, is people making a prediction. Yeah. Yep. To me, that's just noise. I mean, the markets are gonna go up and down. Just, I don't call that noise. I mean, that's just the way markets work. But having somebody approach me and say, "Look, I can eliminate that uncertainty," you know, I just don't believe it. I would agree with you on that. Markets are gonna go up and down, and that's kind of what they do. Markets go up and down, but they tend to go up a little bit more than they go down. They go down. And it comes out, over the long haul, in a very sensible order. Yeah. You know? Stocks do better than bonds. Bonds do better than inflation, so forth. I mean, that's pretty cool. I would agree with you on that. David, thanks for taking some time to run through some of these concepts. I mean, just hugely, hugely powerful, and I love what we're working on here at Dimensional, which is what I think getting people to just feel better about their financial situation and the journey that they're on. Well, you know, that's what motivates me. It's people sometimes say I'm an optimist. I think I'm a realist. This is the way markets work. Yeah. Yeah. And that's a differentiated voice from, I think, a lot of people that are out there in the investment world. So, thanks for the time. Thanks for everything you do. Very good. Thank you.