David Booth: ‘The Markets Work Well for Everybody, Not Just the Insiders’

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Today’s guest on The Long View is David Booth. David is a repeat guest, the founder of Dimensional Fund Advisors, and has just released a new book titled Stay Calm: Learn to Embrace Uncertainty in Investing and Life. One of the interesting through lines on the episode really centered on data. David explained that without data, people are just arguing beliefs. There was so much time within the industry where investors really were in a data desert. That foundational layer was critical to everything that David, his colleagues at Dimensional, and so many others around the broader investing industry have ultimately brought to bear for the benefit of so many investors over the years. Plus, David explained that having access to a more complete dataset can really help provide a sense of calmness and reassurance for investors, even in an uncertain environment.

Episode Highlights

• How Market Data Revolutionized Investing
• Learning From Eugene Fama
• Communicating Financial Science
• What is the Efficient-Market Hypothesis?
• Diversification and the Limits of Indexing
• Is Dimensional Active or Passive?
• The Science Behind Factor Investing
• Trusting Markets and Embracing Uncertainty

If you have a comment or a guest idea, please email us at TheLongView@Morningstar.com.

Transcript

Ben Johnson: Welcome to The Long View. I’m Ben Johnson, head of client solutions with Morningstar.

Amy Arnott: And I’m Amy Arnott, portfolio strategist for Morningstar.

Johnson: Today’s guest on The Long View is David Booth. David is a repeat guest, the founder of Dimensional Fund Advisors, and has just released a new book titled Stay Calm: Learn to Embrace Uncertainty in Investing and Life.

Amy, we had such a terrific conversation with David, and there are almost too many highlights for me to choose from. I’m going to really call out what I thought was one of the interesting through lines, which really centered on data. At one point, David shared with us, without data, people are just arguing beliefs. There was so much time within our industry where investors really were in a data desert. And really that foundational layer was critical to everything that David, his colleagues at Dimensional, and so many others around the broader investing industry have ultimately brought to bear for the benefit of so many investors over the years who once may have felt like outsiders and are now very much inside and benefiting from decades worth of research and work in a way that they couldn’t have just without that data foundation. The through line of data, as mundane as it seems today in 2026, really stood out to me.

Arnott: Ben, I thought that was a really interesting point too, and I really love David’s comments about how having access to a more complete dataset can really help provide a sense of calmness and reassurance for investors, even in an uncertain environment. Another highlight for me: Stay tuned to find out more about Eugene Fama’s favorite Swedish pop group.

Johnson: Oh no. Now that we’ve got people on the edge of their seats, Amy, without further ado, let’s dig in with David.

David, welcome back to The Long View. Thank you so much for joining Amy and me today.

David Booth: Thanks for having me.

Johnson: David, the occasion for you coming back to the podcast is that you’ve just published a new book, Stay Calm: Learn to Embrace Uncertainty in Investing and Life. I want to start with the life bit of that. Notably in the book, you describe yourself as a bit of an outsider, having been born in Garnett, Kansas, and being Kansas-born and bred. How did that ultimately become part of the way that you view the world and, by extension, in your career, form the way that you viewed markets investing in a way that fundamentally was different from and in many ways has reshaped what were conventional Wall Street norms?

Booth: Well, I think a lot of people view themselves as being outsiders, and my parents were kind of that way, and they thought that, well, the insiders make all the money, so I’m not going to invest because the insiders will just take advantage of me. That’s unfortunately a view a lot of people have. And that’s where the science has really helped people a lot: The development of financial science in the ’60s and ’70s. The conclusion is that the markets work well for everybody, not just the insiders. In fact, the insiders seem to have a rough time doing as well as the market. It’s actually the outsiders that should feel good about all this academic research and so forth because today you can buy market portfolios very easily. You can buy the market, and that seems to be about as well as the pros do.

Now personally, also being an outsider, coming in, then going to the University of Chicago in the Ph.D. program in the late ’60s, it was an incredibly stimulating time. The field of finance was changing, and you could characterize these academics themselves as being outsiders to the mainstream Wall Street crowd. In fact, all this research really challenged the prevailing point of view of Wall Street in the ’60s and ’70s and led to this revolution in finance that’s really helped people tremendously. The result of this research and the applications is that fees are much lower, so that’s got to help. And then portfolios are better designed and so forth. All of that comes from having these academics that are kind of outsiders examining the data.

Before 1960, researchers really didn’t have the data to analyze a lot of the claims of people on Wall Street, and that all changed in the ’60s, and with that, an explosion of research. Along with that came some complicated ideas, but there also came a lot of great insights that are really helpful to everybody.

Johnson: David, I want to ask a quick follow-up there. You mentioned just something as simple as the notion that, up until that period of time, hadn’t been documented, shows that markets, stock markets deliver roughly 10% annual returns.

Now, in sort of looking in the rearview mirror, it seems awfully mundane and has just, I think, become internalized by a lot of investors. Why was that such a sort of seminal moment, in hindsight? The fact that these markets that work so well for so many and have now for decades—it was kind of a discovery. It feels like, in the world of finance and investing, almost the equivalent of the discovery of fire in my mind.

Booth: Well, I mean, in some ways it is similar. See, because when you don’t have data and people are making all kinds of claims, that’s when people really did feel like outsiders and probably they could be taken advantage of because you didn’t have data to show them any other way. And then with the data, all of a sudden people could feel comfortable. The markets worked the way that we hoped they would. Stocks do better than bonds over the long haul and so forth. And over the long haul, stocks have about a 10% return. That sounds like a fair deal.

I mean, you’re covering, now we have 100 years of data, and now at Morningstar, you have 100 years of data, research quality, that covers a wide range of scenarios. As a researcher, you want a good test sample, right? Well, how about the last 100 years if you’re examining stock and bond returns? You start with the Great Depression, you go through World War II, the Korean War, periods of high inflation, the Great Recession, so on and so forth. If you’re looking for a test period, the last 100 years is about as good as you’re going to come up with. Through all of that, 10% a year, which is part of the reason that I wrote the book as well; a lot of people have anxiety about markets today. Some seems elevated this year more than some other years.

And what we want to do is, if people understood better how markets work, I think they’d be more optimistic about investing and feel more confident they can have a good investment experience long term. The main thing I learned from Chicago, well, one of the many things, was just if you’re having conversations with people, if you don’t have data, you’re just arguing beliefs, and you can believe anything. I mean, so the data was revolutionary.

Arnott: Right. I was going to say when you have access to data, I think that can help you stay calm. If there’s a big decline in the market, you realize that’s not unusual, and things usually do turn around or always turn around eventually.

Booth: Well, one of the things that I’ve been working on in the last dozen years or so is just basically drawing parallels to what goes on in investing with what goes on in life and this whole notion of dealing with uncertainty. First thing we try to talk to people about is just uncertainty creates opportunity. And that sounds strange at first, but if there were no uncertainty, it’d probably be difficult for you to progress in life. And the same thing is true in investing. If there were no uncertainty, then everything’s riskless, and all investments would have the riskless rate of return. It’s the uncertainty that creates opportunity. Once you get people comfortable with that, then you say, so in reality, what it’s about is managing uncertainty, not totally eliminating uncertainty. With that, then you can start to figure out how to develop an overall investment plan.

Arnott: As you mentioned, you were a graduate student at the University of Chicago in the late 1960s, which was sort of the epicenter of this big revolution in finance that was going on. You sat in Professor Eugene Fama’s class and learned about the efficient-market hypothesis. What was it like learning from Fama, and when did it sort of click for you that markets might be more efficient than most people believed?

Booth: Well, basically the first day of class, he kind of outlines his view of markets and how they work. I go, “That makes sense to me.” I mean, my parents never invested. I had no experience in investing. I go, “That makes so much sense.” It wasn’t until later I realized what an unusual opinion that was. And it was more than just Fama. The finance faculty there were really amazing, and being able to work with them, present papers to them, and then see their research as it was coming out, it was incredibly stimulating. This was back before any of them had gotten the Nobel Prize in economics. A number of them went on to become Nobel laureates. In fact, of the people I worked with way back then, I mean, three of them got Nobel Prizes, and then our mutual fund board has those, in addition to Merton Miller and Myron Scholes, and they’ve added Bob Merton and Doug Diamond over time.

In total, we’ve worked with five Nobel laureates. These were all young, bright people doing great research at the time. If you could read the research, you could see it was explosive and incredibly important, which was eventually what I figured out was something that turned out to be good for me and good for the business school. I realized I probably was better off trying to apply the ideas and letting people like Fama and Merton Miller and Myron Scholes develop the great ideas. That’s how history unfolded, and these are still good friends. The people I studied with, we were all young back then. Now we’re all really old, but it’s been a great career.

Arnott: One of the anecdotes I really loved in the book was when you wrote about how you threw a party for Eugene Fama at the ABBA Museum in Stockholm, Sweden, in celebration of his Nobel Prize. What was that like?

Booth: Well, it’s kind of a University of Chicago story. I’d been to the Nobel ceremony when Myron Scholes and Bob Merton got their Nobel Prize and saw how the whole thing worked. It’s like a weeklong celebration, and they don’t give these Nobel laureates much time on their own. They had two free nights, and Gene Fama invited me to go with him. They’d given him a certain number of tickets. Well, in addition, because Gene has four kids and a number of grandkids, he only had two tickets left for friends. So, his long-term colleague, Ken French, and I, he invited us to join them. I said, “OK, but I know how this works, Gene, and I don’t think you’re going to do a good job of planning a party. Let me plan those two free nights.” And so I called up the ABBA Museum. Stockholm has an ABBA museum.

I said, “I’d like to rent the museum out tonight for a party.” They go, “Well, we don’t do that.” I go, “Nobel this, Nobel that.” Eventually I wore them down, and they said, “OK, well, we’ll rent you the museum.” We had dinner with our little group, Gene’s kids and grandkids and Ken French and me, and had dinner at the museum and then afterward had the tour of the museum. One part of the tour was really kind of cool. They had this platform with a microphone and a scrim behind them with all four ABBA singers. Gene’s kids are incredibly talented, so everybody’s fighting for time at the mic, singing ABBA songs in the background. They would lipsync them, I guess. This is going on, and it’s really just a lot of fun.

I looked over at Gene, and Gene is just a lovely human being and a great mentor of mine, a great friend. I wouldn’t characterize him as a party animal. I look at him, and you could see the smile on his face, and he was really enjoying this, and I sensed even more, just all this, say, 50 years of work they put in on all this research, and this was kind of his reward, and he was really enjoying it. It made me feel good.

Johnson: What an incredible moment, the meeting of the father of the efficient-market hypothesis with Dancing Queen in real time. I can only imagine, and you do such a good job of describing it, David. I’m curious: When you look back now, and you’ve effectively bookended 50 years’ worth of work that I think still to this day feels revolutionary, but when you think back to the time in the ’60s when Gene first published his work on the efficient-market hypothesis, did it feel even more revolutionary in that moment? And if yes or no, why or why not?

Booth: Well, no. Maybe a way to describe the feeling I had was that this year has been kind of a big event year; coming out with a book, we had our 45th anniversary, we crossed a trillion dollars in assets under management, and it’s been a time for me to sit back and reflect on my 57 years in the business and all the good memories and the good times. You kind of overlook a lot of the tough times and the anxiety and focus on what’s really been accomplished. And I think, going back to that ABBA Museum, I think what I got a glimpse of was Gene really kind of internalizing all the good stuff that had happened. I’m thrilled to be able to share that with him and his family.

And you have to understand, I think a lot of us take a lot of pride in what’s happened in the last 57 years or 60 years with all this research. It’s made investing in public markets easily accessible for everybody. There’s no excuse not to invest, and there’s no excuse for not being optimistic that you can have a good investment experience. You’ve got to feel good about that.

Arnott: You write that about 10 or 12 years ago, you realized that if you wanted more people to know about DFA’s approach to investing, you needed to change how you talked about investing to get more people to understand and have conversations around it. You’ve been having meetings every week with what you call the Tuesday group, which is a group of about 10 people, including Senator Bill Bradley, as well as Karen Dolan, who’s a former Morningstar employee. I’m curious, how did those meetings help shape your approach to writing this book?

Booth: Well, I mean, I think communication is really—nobody has a monopoly on how to do it. It’s so important for me to be able to talk to the average person. I’m steeped in quantitative methods, and while those methods are useful and kind of the cornerstone of the firm, in terms of talking to people, it kind of gets in the way. How can we talk to people and have them relate to what has really gone on with all this academic research?

The format I use now is that, first off, I start talking to people: What do you think of as true wealth? What do you really value? I bring that up because my parents grew up during the Depression and then fought in World War II and so forth and were never able to accumulate a lot and didn’t invest in public markets, and they didn’t live as well in retirement as they probably could have. Anyway, I think about them; I start with talking about embracing uncertainty, which we’ve covered here. That’s uncertainty that creates the opportunity.

With my parents, their true wealth was family. Their goal in life was to raise a good family, which they did. They were spectacular. And I tell people, look, they were wealthy; they just didn’t have much money. There’s a difference between wealth and having lots of money. Start with that, and then we need to embrace uncertainty a little. Anyway, I summarize all this academic research that’s been going on in the last 60 years and say, look, it comes in two parts.

First, stocks and bonds, with 100 years of data supporting this, behave like we hoped they would. Stocks do better than bonds because they’re riskier. Over the long haul, stocks do about 10% a year, bonds do 4.5% or 5%. That’s uplifting. You should feel good about that. There are no guarantees about the future for sure. I find they talk about guarantees all the time. People want guarantees, obviously in life and in investing. A lot of times there aren’t guarantees about the big issues.

My view is people want to feel safe. And by safe in their personal lives, they don’t necessarily mean nothing bad can happen to them. I think it usually means something like, regardless of what happens, I’m going to be OK. I feel like I’m going to be OK. If you can feel like that in your personal life, then you kind of feel safe. I think the same thing applies in investing. If people understood better how markets work, then they could relax a bit and feel safe, stay calm. Once again, kind of draw a parallel between people’s personal lives and investing. Parallels are really strong, I think.

Johnson: David, I want to start to weave together some of these threads that we’ve picked up on. We’ve mentioned already the efficient-market hypothesis, or EMH, in passing, and I think you rightly shared that no one’s got a monopoly on language. Though I think what we find, in going back to a remark you made earlier, is that I think many investors to this day may still feel like they’re on the outside looking in.

In an effort to bring more people in, I’m wondering if you could explain the basics of the efficient-market hypothesis to our audience, either that needed a dust-up or otherwise just uninitiated. What does EMH mean in plain English, and why does it still matter so much when we think about more broadly the science of investing today?

Booth: Well, basically it says that probably people can’t outguess the market. The market does a great job of setting prices. Using Fama’s language, it reflects all available information. That’s kind of the statement of it and the first part of it.

The other part of it is you don’t have to try to outguess the market in order to have a good experience. In some ways, that’s the bigger message. Markets work like we hope they would, and you can buy market portfolios easily. You don’t have to try to outguess the market. You can sit back and let markets work for you. I mean, the markets are where buyers and sellers come together, and people don’t trade unless each side thinks they got a good deal.

And I think largely in stock and bond markets, it’s the big institutional investors that are really setting prices. If institutions perceive prices deviate a little bit from fair price, they jump in all over that on one side or the other. You have these big powerhouses duking it out, each with access to similar information and so forth.

And that kind of environment, what should pop out are fair prices, and that seems to be the case. If you look at market prices, the efficient market says they are where they should be. Markets aren’t perfect, but people don’t seem to be able to do better than that. They try to outguess the market; they end up generating a lot of costs, and I would argue, generate a lot of anxiety that’s not necessary.

So, the implication is there are straightforward ways to invest where you don’t have to do all the things you thought you had to do in order to have a good experience.

Arnott: If markets are generally efficient, what does that imply about the role and limitations of actively managed funds? Do you think the average investor should generally avoid active funds, or do you think there’s still a role for them, maybe as a smaller percentage of a portfolio?

Booth: I think you’re onto something there with a smaller percentage. I mean, I’ve been around long enough to realize people are people. I mean, they get attracted to all kinds of wild ideas and strategies and ways to do better.

I’ve learned to say, OK, let’s take 10% or 20% of your portfolio, and you can deal with it. Call it mad money, invest in all these crazy ideas that you seem to be enamored with, but let’s make sure 80% or 90% of the money or is it invested in a sensible long-term way rather than argue with people that if they say, well, I’m really intrigued by this or that, I go, OK, well, it doesn’t float my boat, but let’s make sure we stick to what the evidence from the science tells us. We kind of stress that our approach is really based on scientifically based hope, as I would characterize it.

Without the science, hope really just kind of becomes a wish. That’s the transformation. If you would like to have a good investment experience, and then based on the science, there’s no reason why you shouldn’t have the expectation of having a good experience. If you want to gamble a little bit on all this stuff and predictive markets and all of that, I know what the long-term outcome of that sort of thing’s going to be, but I’m not going to waste my time trying to convince people they have a negative expected outcome engaging in those markets.

Johnson: David, that, I think, leaves a lot of investors in a place where you choose to take a meal ticket for what is often described as the only free lunch in this business, which is just basic diversification. I’m curious about your thoughts and how they’ve evolved on diversification.

I think this is timely because where we sit now in this particular moment in markets more broadly is a moment wherein many of the major market index that we look at look increasingly concentrated with respect to not just the percentage of these index portfolios that are comprised by a small handful of names, but the amount of earnings that those names are generating, the amount of incremental capital expenditure that those firms are pouring into the economy. Is there a risk that diversification, just in its purest sense, just owning the basic market, is at risk of potentially disappointing investors?

Booth: Well, first off, I mean, I think those are legitimate concerns. It does suggest that you want to maybe focus a bit more on viewing stocks as being a global market rather than just the US. Internationally, there isn’t that concentration. If you had half your money outside the US, then half of that problem goes away anyway. There’s not really a great answer to that. It looks like the industry’s going forward; there might be a lot of concentration because that’s really where the great ideas seem to be concentrated in some narrow industries.

On the other hand, personally, I am worried about some of that concentration. Our basic investment approach is to hold all those stocks. We have a tendency to hold them in smaller amounts than they represent in the index, but I don’t know what the alternative is.

My guess is over the long haul, the markets will take care of that. In other words, one of my favorite kinds of examples is to go back to the gold rush. The gold rush in California in the 19th century, flurry of activity. It opened up the West, really, but who made the big money? I mean, you could argue it was Levi Strauss.

So, the point being, with all these high-tech firms and so forth, there’ll be winners and losers on that for sure. I don’t know if anybody can predict who the big winners will be and who the big losers will be, but there’ll be big winners and losers. And the economy, I think the benefit on the economy will spread out, and you’ll see benefit in a lot of the areas outside of this tech. But for the time being, that’s kind of the way the market’s configured.

Johnson: Yeah, I think that’s a classic example. I think certainly in that moment, though, it’s not one that anyone here lived through. I think many would’ve expected the big winners would be holding gold nuggets and not wearing blue jeans.

Booth: Yeah. Being a product of the ’60s, I can tell you jeans are a big deal, a big part of life.

Arnott: And still are today.

Booth: And still are today. Yeah.

Arnott: When you founded Dimensional back in 1981, what problem were you trying to solve that indexing alone didn’t fully address?

Booth: Well, let me kind of back up a little bit about the firm now and what our goal is and our mission is really to apply the science in a way that makes sense. Let’s go back even to the mid ’60s. When the research first started coming out about the dismal performance of professionally managed portfolios, people go, “Well, if you can’t outguess the market, what are you supposed to do?”

And I started work at Wells Fargo. I decided I didn’t want to be a professor after all, and I walked into Fama’s office. I was working for Gene at the time and said, “I’m going to leave.” He goes, “Well, I have this guy out in San Francisco. He’s one of my students. I’ll give him a call.” That was Mac McQuown. And Mac was running kind of the think tank at Wells Fargo and working on trying to apply quantitative methods to various parts of the bank.

And in the investment area, he had this group that I went to work with, and we had two outside consultants, Fischer Black and Myron Scholes, who were working with us on it. While they were working with us, they developed the Black-Scholes option pricing model. I mean, you have to understand, this is the wild west of research. I mean, new ideas are popping up all the time in a way that they haven’t been for the last, say, 20 years or so.

Anyway, what our group was working on is how we could form portfolios that can beat the market without trying to outguess the market, because we don’t think picking stocks has a positive value-add. We came up with a strategy, the so-called Samsonite strategy, which was the idea that we can create a portfolio that has a higher beta than the market, and so it should outperform the market.

I mean, it’s a pretty naive idea. It was an equally weighted index-type approach. We were young and naive in those days. There wasn’t anything wrong with the idea. It wasn’t a big winner, but we were trying to figure out where the science takes us.

And then the trust department, the bank, and it must be some marketing genius came along and said, “What you really want to do is an S&P 500 index fund.” And the trust department goes, “Yep, that’s it.” And so they went down that path, and that turned out to be a huge winner. That group got sold a couple of times, and now it’s really the cornerstone of BlackRock and iShares, that indexing group.

That was an idea that really took off. And we go, yeah, but as a scientist, I wouldn’t want to have an index fund. I mean, I wouldn’t throw it out either, but it’s leaving something on the table. I mean, a couple of reasons why. Well, number one is if you have a constraint on yourself, I want to track this index from just basic economic theory: Constraints have a cost.

The second part is if you are an index fund manager, you’ve got to trade at the same time all the other index fund managers do when a new stock comes in or out of the index. And trading at the same time everybody else is trading probably is not a good idea.

We went down the path, and our group eventually got shut down, but we reconstituted ourselves eventually into Dimensional in 1981 with the help of these big academics that we’ve mentioned. I was dedicated to the idea that we can engineer it on the construction side, portfolios, better than the index providers do out there. And then, we’re not going to try to have zero tracking here relative to our benchmark. We’ll use a little bit of flexibility in trading.

There are any number of things that can happen to you. Suppose you have a list of stocks and an amount that you want to buy in each, and you go to the marketplace. Well, you want to adapt to what’s going on in the marketplace. Some trades are tougher than others, and you kind of want to load up on the easy trades and avoid the tough trades, and you can do very clever things on securities lending and whatnot. If there are any number of all these things, we can call them market mechanisms. If you pay attention to those details, you can add a basis point here or there. Over the long haul, if you can add 10 or 20 basis points or more to returns after fees, then you’ve done a heck of a job.

We avoided the indexing route. We went down the, I would call it applying the science route. Indexing is fine. I don’t think that’s an elegant solution to what we’ve learned from research. I know that puts me in a minority here, but whatever. You asked my opinion. I was giving you my opinion.

Johnson: I want to be so bold as to ask you for another opinion, David, and this one goes largely to a semantic argument. The approach that you’ve described and that Dimensional’s applied now for 45 years, would you typify that as being an active approach or a passive one?

Booth: Well, for years I called it passive, but then the Securities and Exchange Commission came out with language on our ETFs. If you don’t have zero tracking error, then you’re an active ETF. Now, I’m an active ETF.

Whatever the name is, it’s really trying to apply the science. Our kind of message is if you have a pension fund, you can’t increase your pension benefits if you have zero tracking error. If we can make you more money, then you can pay greater pension benefits or whatever.

I’ll go back earlier. You said, look, markets are largely efficient. And how do we talk about that? And the way I characterize it is there’s evidence that markets aren’t perfectly efficient. You can get examples here and there, all kinds of anecdotes. I don’t think they amount to a whole lot, but that suggests the markets may not be efficient here or there.

My answer to that is, well, if there are any inefficiencies out there, that’s what’s in short supply. It’s unrealistic to think that if a manager is clever enough to find those inefficiencies, they wouldn’t just raise their fees to the point where they capture all the vigorish instead of passing it on to their clients.

I mean, look at, that’s the history of people with great long-term track records. They have a tendency to keep raising their fees until the pain is too great. The implication of that is for your average investor, don’t worry about it. There are some people out there that can kind of do better. It’s unlikely you’re going to participate in that because if somebody’s got the juice, they’re probably not going to share it with you, is the way I characterize it.

Johnson: I want to follow up on some of these science-based, research-derived inefficiencies that you’ve discovered and tried to exploit over the years; things like size, value, and more recently direct profitability.

How should investors think about what are often called factors, or these dimensions of expected returns, without overcomplicating things or feeling like they’re reading the driver’s manual to a Klingon spaceship?

Booth: Well, I think the way to think about it is the first step in thinking about investing in stocks is, OK, let’s look at the overall market. I’ll start there. I’ll just buy the plain market. If I have enough money to buy 1% of all the stocks, I’ll buy 1% of everything. That causes you to put more money in the larger companies and less in the smaller companies, but you have the same overall ownership percentage. Then you look at the research, and the research, as you point out, suggests that smaller stocks have higher average returns, and bigger companies and lower-price stocks have higher average returns. And then that’s where you kind of got to get into how confident are you in that?

These findings cover long periods of time. There can be long periods of time when they don’t work the way we hoped they would. In fact, our first nine years, when largely almost everything we had was US small cap, we started at the beginning of a terrible run for small cap. The first nine years, we underperformed large-cap stocks by quite a bit; our funds did.

Well, the last 35 years have been great. Overall, it’s done well. But the point is, if you were an investor in that first nine years when our returns look pretty ugly, not everybody was able to stay invested. We lost a few clients along the way, as you might expect, but that shows the importance of not being overly confident about whatever the research ends up showing.

One of the concerns you always have in looking at research is: Is this really just due to data mining, or is this dimension or factor that we’ve observed, is that really real? Can I really implement it? Those are complicated questions. My answer to it is you start with the market, then you start leaning toward smaller companies or lower-price stocks or higher direct profitability. That’s a lot of gobbledygook. We have all of those options available to people so they can kind of decide for themselves.

For example, small-cap stocks, I think, have higher average returns because they’re riskier, and risk and return are related. So, other people might have a different point of view. Data, I think, kind of makes me feel good about that. And we’ve observed long periods of time when that doesn’t hold. Gosh, a few years ago, we had a 10-year run on the FAANG stocks, and that caused people to get really attracted. Maybe there’s magic here.

If there’s one thing I would try to suggest people keep in mind is there’s no magic out there. We don’t have any silver bullets. Investing—and life—is usually dealing with trade-offs rather than having optimal solutions.

Johnson: David, I have a follow-up question for you more broadly in the vein of research. When you think about some of the original research, especially underpinning Dimensional’s investment process, there’s a moment where the raw materials of a lot of this were physical paper, pencils, and slide rules. And we fast-forward to today, and every day there’s more data created in 24 hours than there had been in the whole of human history. The raw computational horsepower we have at our fingertips is something we could have only dreamed of decades ago.

What are the risks or opportunities there, and how do you see those manifesting to maybe unlock not pure magic, but another increment of magic that might be beneficial to investors? Do we also simultaneously have to have a much better filter than we ever have before because there’s more apparent magic, things that don’t hold up when they descend from the ivory towers of academia down to the mean streets of reality?

Booth: Yeah, no, I think you’re onto something there. We have a lot more data than we ever had in the past, for sure. I don’t know if we have a lot more meaningful information. A few years ago we did a movie; actually, it ended up being an Errol Morris film called Tune Out the Noise, and we put it on YouTube, and we had over 30 million views.

I’m encouraged by that in the sense that people are trying to say, with all this complexity that’s out there, how can I work through all that as an outsider and come up with something that’s sensible? Here again, that’s kind of why we wrote the book too, was just to make people feel comfortable. Yeah, things are probably more complex than they were, and clearly people are going to have to be able to think more critically than they’ve been required to do in the past, but it’s not clear that complexity is adding a lot of value to people. I mean, are people happier now because we have a lot more information, or do they have more anxiety? I don’t know.

Arnott: With that background of constant news flow, market data, and noise, how can investors tell the difference between information that’s useful versus something that is distracting or even harmful?

Booth: Well, I think you’ve got to start with a point of view or an investment philosophy or something grounded in science. We can start with just a simple idea. I’m going to buy market portfolios for my equity to be global or buy a market portfolio; to me, it’s just something that has hundreds or thousands of stocks in it and low turnover, low cost. That’s what I’m going to do. Start with that on the equity side and then a fixed-income strategy that meets your needs.

And then start to say, well, here’s some alternative points of view that I want to consider. Bitcoin isn’t in the stock indexes, and personally I don’t hold it, but a lot of people are enamored with that. OK, well, so you pay attention to what’s going on, and if you see some things that appeal to you, I would say you want to always be able to adapt and experiment a little bit on the margin, find out what really works best for you. And if you experiment with things and they seem to work well for you, maybe you want to add more to it. If they don’t work so well for you, maybe you want to give up on them.

But I like to start with a solution that undoubtedly makes sense. Let’s say you end up putting half your money into an equity market and half the money into fixed income. Can’t go too wrong with that, I don’t think. But it leads into one other question. Sometimes when we try to explain things simply, we end up sounding simplistic. Everybody has a serious financial issue no matter how much money you have. Eventually, even if you have a lot, you have estate planning and all kinds of issues.

So, the financial side is complex, and what amazes me is that people, when they have a serious medical issue, they go to a doctor. And we all have a serious financial issue. I think what you want to do is find out where you can get good advice or help in making a decision. I mean, whether it’s data and software that you folks provide and Morningstar provides, or if it’s talking directly to a financial advisor, I think people need help. When I’m approaching the problem of what do you do, I wouldn’t try to do it all on my own.

Johnson: I think that’s an all-important point, David, and I don’t know if it was you that first said it, but personally, anecdotally, I remember once upon a time hearing you first say it that the bottom of all of these numbers, all of this data, all of this money is people, and people who need to ultimately trust the people that they’re entrusting their wealth with, which is fundamental and is, at least in my book, which I’ll never write, not going to change anytime soon.

Booth: Right. Well, I think that’s right. I mean, the first point I guess I’m making is I think you can trust the stock and bond markets, and I think you can find trusted advice, whether it’s Morningstar or you’re a financial advisor or whatever. There are a lot of people out there you can’t trust, and there’s a lot of advice you can’t trust. Be careful about all of that.

But at the end of the day, I tell our employees, providing investment solutions is our business and trust is our product. I mean, that’s the bottom line. You’ve got to find, and here you’re going back to creating the book, that if people better understood how markets work, to better able to trust markets. And with that, I think they can stay calm and feel safe.

Johnson: David, the book is about much more than markets and investing in the science thereof. How more broadly has the idea of just embracing uncertainty changed how you think in turn more broadly about just success in the broadest terms, wealth and just fundamentally living a meaningful life?

Booth: Well, it’s meant an awful lot to me. I studied econometrics at the University of Chicago, which is basically trying to apply math to economic data. Any model of the economy, there’s so much uncertainty in an economy. I don’t know how anybody could forecast anything, but you study how to deal with uncertainty, and it took me a lot of years to really wake up and go, “Well, that’s true in investing,” which I studied at school, and it really applies to life as well. How do people make decisions?

In that regard, sometimes I say uncertainty is underrated. People go, “Don’t you mean overrated?” No, it’s underrated because that’s what really creates the opportunity. It’s been so much fun and so valuable to me personally, in learning how to deal with uncertainty because in some ways, what I’m finding for a wide range of decisions you have to make involving uncertainty, there are some of the kind of rules of thumb.

One is to plan; don’t try to predict too much. The stuff that’s predictable, those are easy decisions to deal with. It’s stuff that’s not predictable, like the stock market. Don’t waste your time trying to predict the unpredictable. You’ve got to come up with a sensible plan for dealing with the market and so forth, but then you want to pay attention to what’s going on, adapt to it, look for new information, play for the long haul, and come up with sensible solutions.

At the end of it all, judge yourself by the quality of the decision you make and not the outcome. Outcomes are important, but when you’re dealing with uncertainty, sometimes they end up being disappointing. That’s why they call it uncertainty. That sounds like I got a lot of gobbledygook, but that ends up being tied in closely to my personal life process for dealing with uncertainty.

Arnott: I think that’s a great reminder that you can only control the quality of your decision-making and not necessarily the outcome.

Booth: If you make good decisions over the long haul, probably life will turn out well for you, I think.

Arnott: Right. Before we wrap up, if people listening remember just one principle from your career and this book, what would it be?

Booth: Well, I think it’s to be optimistic about publicly traded stocks and bonds. They really work for you. Trust the markets. Stay calm and stay invested.

Johnson: David, I think that’s the absolute perfect note to finish on. We certainly won’t put you on the spot and ask you to sing any ABBA songs for us karaoke style. We have thoroughly enjoyed this conversation today.

Booth: I’ve had a lot of fun with it too, and I’ve enjoyed working with you folks over the years.

Arnott: Well, thanks again, David. I really enjoyed reading the book.

Booth: Thank you.

Johnson: Thank you for joining us on The Long View. If you could, please take a moment to subscribe to and rate the podcast on Apple, Spotify, or wherever you get your podcasts. You can follow me on social media at @MstarBenJohnson on X or at Ben Johnson, CFA on LinkedIn.

Arnott: And at Amy Arnott on LinkedIn.

Johnson: George Castady is our engineer for the podcast. Jessica Bebel produces the show notes each week, and Jennifer Gierat copy edits our transcripts.

Finally, we’d love to get your feedback. Finally, we’d love to get your feedback. If you have a comment or a guest idea, please email us at thelongview@morningstar.com. Until next time, thanks for joining us.