The creation of the CRISP database in the 1960s provided the necessary data for financial theories to be rigorously tested, transforming finance from a collection of ideas into an empirical science. This gave early researchers like Gene Fama a significant first-mover advantage.
In the 1970s, two distinct investing approaches emerged from one team at Wells Fargo. One focused on simple market tracking (S&P 500), which evolved into BlackRock. The other, a scientific approach to outperform indexing via factors, became the foundation for Dimensional Fund Advisors.
While rooted in academic research showing small stocks outperformed, Dimensional's initial decision to define "small cap" as the bottom NYSE quintile was a strategic marketing choice. This allowed them to offer a product institutions demonstrably lacked, creating an easy sales narrative before multi-factor models were formalized.
Initial resistance to indexing from Wall Street was driven by business model conflict, not investment philosophy. Indexing's core tenet—that frequent trading is a negative expected outcome—directly undermined the commission-based revenue stream that was the cornerstone of the brokerage industry at the time.
A key flaw in pure indexing is the forced, predictable trading around index rebalancing. When a stock is added, all index funds must buy it, often at an inflated price due to front-running. David Booth estimates this systematic inefficiency costs index fund investors a "run up" of about 4% on new additions.
DFA's trading strategy exploits the urgency of active managers who believe their informational advantage has a short half-life, forcing them to trade immediately. DFA, being indifferent to any single stock, can patiently provide liquidity and, in return, achieve better pricing for its clients.
Investors should reframe uncertainty not as something to be feared, but as the fundamental source of opportunity. If there were no uncertainty, all investments would offer the same risk-free return. The challenge is not to avoid uncertainty, but to manage it through a disciplined plan.
Investors incorrectly interpret a market decline as a signal for future trouble, prompting them to sell. The correct view is that the decline is a rational repricing based on *already known* bad news. The market isn't telling you to act; it's explaining why it is where it is.
When assessing a crisis, investors should remember the unpriced factor of human ingenuity. David Booth believes that markets efficiently price the initial negative shock but consistently underestimate the speed at which people and companies will innovate to overcome the problem, explaining why recoveries are often surprisingly swift.
Dimensional's late entry into ETFs (2020, despite being founded in 1981) was not an oversight but a choice driven by its distribution channel. Its core clients, fee-only financial advisors, initially preferred the simplicity and guaranteed end-of-day net asset value (NAV) pricing of traditional mutual funds.