David Booth, chairman of Dimensional Fund Advisors, helped create one of the world’s first index funds in 1971.
David Booth founded Dimensional Fund Advisors, an investment firm that now has more than $1 trillion under management, in 1981. But he says he’s never bought an individual stock.
A pioneer of evidence-based and index investing, Booth, 79, rejects stock-picking, market timing and most predictions. “Individual stocks, they go to zero; the stock market’s not going to zero — that’s a forecast I’ll make,” he told DealBook.
Booth talked with Sarah Kessler ahead of the publication of his book, “Stay Calm,” about long-term, systematic investing in a world that increasingly looks like a casino.
You wrote that it’s never been easier for people to gamble under the pretense of investing. Tell me more about that.
You look at all the prediction markets and so forth, it’s pretty easy to call that investing. But it really couldn’t be more like gambling. And you have all these derivative contracts, futures contracts, so forth. It’s easy to get all kinds of leverage very easily now. You have any number of ways of taking sometimes extraordinary risks, without even thinking about it.
How has that affected markets or companies?
I don’t know if long-term it has much impact other than having a lot of younger people lose all their money over time.
Do you think passive investing has contributed to a concentration in indexes?
I think the concentration comes from people analyzing companies and saying that these companies are worth a ton of money.
There’s an argument that the more successful the companies are, the more they’re automatically bought through passive investing strategies — and overvalued because of that.
Those are interesting arguments, but the index funds don’t really trade much. I think it’s probably the investment community really driving up prices.
One of the remarkable things, over the last 30, 40, 50 years, is the movement toward index funds. Let’s say it’s half of the total stock market. All things being equal, wouldn’t you expect trading volume in the stock market to be about half of what it was before?
Because half of it’s in these index funds that don’t really trade much. And in fact, we’ve seen a rapid increase in trading volume.
I think one of the contributing factors is people may have moved away from picking stocks to timing markets and sectors. An index fund is the ideal timing vehicle. You can get in and out of the market with just one ticker symbol.
Like all technologies, indexing can be used for good or bad. I wouldn’t say trying to time the markets is evil, but based on all the evidence, it looks like it’s more like gambling than it is a productive way to invest.
In your book, you make many comparisons between investing and life. Have you always seen things that way?
I had a breakthrough about 10 years ago. Really, the economy is incredibly complex and you can’t model it exactly. But so is life.
The stuff you can’t control is important and you want to manage that. But you primarily are going to make decisions about controlling what you can control, like how much risk you take.
Don’t try to predict the unpredictable. Plan for it. Adapt and be flexible. And when you get off track, figure out what it takes to get back on track. That’s the way you go through life.