During a brutal nine-year period where their small-cap fund returned 2% annually versus the S&P 500's 14%, Dimensional retained clients by consistently reaffirming the long-term investment thesis. They emphasized the quality of the decision to diversify, not the disappointing short-term results.
Investors spend hours on due diligence before buying but rarely pre-define their selling criteria. This leads to emotional decisions, typically selling after a period of underperformance, which undermines the initial long-term thesis. A pre-defined sell plan is crucial for success.
David Booth's close relationship with researcher Eugene Fama allowed him to get a draft of the seminal three-factor model paper in 1991. He immediately acted on it, flying a client to Chicago to hear the research directly from Fama and launching value strategies before the academic world had seen the published work.
Instead of designing funds to meet popular demand, DFA focused on leading with research and ideas they believed in. This educational approach attracted high-conviction clients who understood the philosophy, making them more likely to remain invested during periods of underperformance.
The AI revolution will create huge winners and losers, making stock picking difficult. David Booth draws a parallel to the gold rush, where Levi Strauss made a fortune selling jeans to miners. The true beneficiaries of AI might be ancillary businesses, not the headline-grabbing AI firms, reinforcing the case for diversification.
David Booth's father kept $15,000 cash in a safe deposit box. Had that amount been invested in the stock market in 1945, it would have grown to over a million by 1985, and that million would have grown to many more millions since. This illustrates the tragic opportunity cost of fearing markets.
When asked how Dimensional survived its first nine years of poor performance without paying a dividend, David Booth cited their unwavering belief that their work was valuable. This core conviction is non-negotiable for weathering the inevitable and prolonged storms of building a business.