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Introduction

David Booth is a visionary investor and the co-founder of Dimensional Fund Advisors (DFA), a firm he launched in 1981 to bring academic finance into real-world investing. Educated under Nobel laureate Eugene Fama at the University of Chicago, Booth became a pioneer of evidence-based, systematic investing, helping to popularize passive strategies.  

Over the 20 years ending September 2024, 84% of DFA’s U.S. funds outperformed their benchmarks, compared to just 17% of typical active funds. Recent performance includes returns of 15.98% over 1 year, 9.09% annualized over 3 years, 15.87% over 5 years, and 7.54% over 10 years. 

Booth is also the central figure in the new documentary, Tune Out the Noise, directed by Oscar-winner Errol Morris. The film explores how academic research at the University of Chicago transformed financial markets, focusing on DFA’s founding and evolution.

Featuring Nobel laureates such as Fama, Myron Scholes, and Robert C. Merton, the film focuses on the power of data-driven investing, risk management, and behavioral discipline. The film tells the story of Booth’s impact and shows how research and science still play a big role in how he invests today.

In this recent interview, which has been edited for length and clarity, Booth discusses his investing philosophy, how his firm seeks to outperform market indexes, and what most investors misunderstand about the stock market.

MarketWatch: In the documentary, Tune Out the Noise, you describe your work as a pursuit of truth. What did you mean by that? 

Booth: A lot of things that people assumed was a virtue didn’t turn out to be true. The basic one is that anybody can beat the market if they just pay attention and work hard. That turned out not to be true. The pursuit of truth involves a lot of research which gives you insights from the past that hopefully are helpful going forward. People want the absolute truth but I’m afraid that’s just not available when talking about investments. We do our best analysis on the way markets work, and in our view, we tell you the best way to go forward. However, reasonable people can have different opinions. 

MarketWatch: What’s the biggest myth investors believe about who really wins in the market? 

Booth: Most people think of themselves as outsiders, while the insiders make all the money. That’s just not the case. The evidence is that professional money managers don’t do any better than the market. That should be a revelation to people. In every phase of life, if you work harder and smarter, you’ll probably do better than the guy down the street, but that’s not true when it comes to picking stocks. Because the market knows more than you, it can be very costly to try to bet against it. Once you accept that the market is your friend, life gets a lot easier. There is less second guessing. 

MarketWatch: Do you have a forecast for the current market environment?

Booth: Many people are comfortable making a forecast but there’s not much evidence that people can forecast or predict market returns. Too often, people feel like every year they have to make a change. This year is a good example of why just calming down and staying the course is frequently the best solution. We had a lot of volatility, lots of ups and downs. A lot of people got whipsawed trying to time the market. 

MarketWatch: Do you ever make changes to your strategy based on what the market is doing? 

Booth: We are costantly revising our long-term research to see if the evidence we had before is holding. Maybe we learned something different that we need to include in our long-term strategy. Occasionally, we change our long-term allocations, but we never make changes over the short term. 

MarketWatch: In a market full of uncertainty, what gives you confidence that staying invested for the long term still works?

Booth: Some people call me an optimist. What has bailed us out over the long haul is basic human ingenuity. It’s always worked in the past and I don’t see any reason why it won’t bail us out in the future. What I mean is that people want to make their lives better and the lives of their family better. If something bad happens to them, they don’t sit there and take it. They try to get back on track. That’s what leads to all this ingenuity and progress. It’s frequently three steps forward and two steps backward, but I don’t see a reason why it should not be anything other than optimistic over the long term. 

MarketWatch: How does that principle shape the way Dimensional approaches markets differently than traditional active managers?

Booth: We start with the evidence. Is there really any compelling evidence that you should try to time short term moves in the market? If you look at professional money managers, there’s no compelling evidence they can time short term moves. And yet, individuals think they can go out and time short term moves in the market rather than our approach, which is to take advantage of how markets work. 

MarketWatch: You don’t try to outguess the market, but you also aren’t a traditional indexer. How do you define your approach? 

Booth: Our view is that indexing is a rather mechanical and inflexible approach to investing that leaves money on the table. We’ve developed ways of beating index funds. We try not to outguess the market but work with market mechanisms that can add value to indexing. But it’s close to indexing. 

MarketWatch: How does your fund add value beyond traditional index funds?

Booth: We built our firm on the efficient market hypothesis of Gene Fama, a Nobel Laureate who is one of our founders and directors. It doesn’t make sense to try and outguess the market, but as a professional money manager, there are some things we can do to add value over indexing. For example, while many indexes rebalance as infrequently as once or twice a year, staying flexible allows us to buy and sell securities every day based on up-to-date information on what can improve returns. That flexibility has been a key source of value, because it allows us to seek better prices than index funds may get and helps us avoid holding stocks with lower expected returns. 

MarketWatch: What’s the most sensible way for long-term investors to participate? 

Booth: In the US stock market, thousands if not millions of investors are entering the market every day. There are huge trading volumes. On both sides of the trade are very sophisticated investors with differences of opinion. I’d rather rely on the overall wisdom of crowds, on the collective judgement about pricing, and not try to guess the market. When I go home at night, I’d rather spend more time playing with the kids than trying to figure out what’s going to happen with the market the next day. 

MarketWatch: Do you see a reason why individuals should choose individual stocks? 

Booth: I haven’t come up with one yet and I’ve been doing this for almost 56 years. It’s silly because the market does a good job of setting prices. Why get in the middle of that when there’s no evidence that you know more than the pros. I know that for some people, picking stocks is fun. If you get a kick out of it, then pick a few names as long as you don’t bet the ranch on it and hurt yourself too badly. I don’t view that as serious investing. That’s entertainment. Many people are attracted to what we think of as the noise. I don’t understand how a casual investor can think they can take advantage of pricing mistakes. Why do they think they can do that? 

MarketWatch: What’s the single most important takeaway you’d want long-term investors to remember from your experience?

Booth: Our mission is to try to help people understand the market and how it works. If you understand how it works, you’ll be more likely to invest. Over the long haul, it’s really important for people to start investing early. The power of compounding means that a 10% return on your investment each year—similar to the stock market’s historical annualized average—would double your money every seven years. Find an investment approach you can stick with rather than trying to time all of the short term moves in the market.

MarketWatch: What was your relationship with John Bogle like in the early days?

Booth: John was a hero. He helped us get started. When we started our firm, Vanguard did all of our back office and administrative activities for us such as reconciling trades and making sure dividends and interest payments were collected. Running a mutual fund company is very complex. Eventually, we started doing it on our own. I went to work at Wells Fargo and they were one of the pioneers of indexing as well. We all talked to each other and tried to get these ideas out. This is what I mean by the pursuit of truth. 

MarketWatch: In the movie, Tune Out the Noise, you said you learned a lot from selling shoes. What lessons did you learn? 

Booth: I put myself through school selling shoes, and it was a commission-based system. There was a huge incentive to try and make a sale. I realized when I went home at night, I wanted to feel good about myself. I wouldn’t feel good about myself if I tried to sell a pair of shoes that didn’t fit or was the wrong color. That’s the basis of our firm.