Forty-five years ago a young man in a Brooklyn apartment decided the smartest thing he could do with other people’s money was nothing clever — own the market, keep costs low, stop guessing. The firm he built on that idea, Dimensional Fund Advisors, just passed $1 trillion in assets under management. David Booth turns 80 this year, and he has a new book out. It’s called “Stay Calm,” and the title is doing exactly what it says.
“Stay Calm: Learn to Embrace Uncertainty in Investing and Life” (Authors Equity, 220 pages) arrived Sept. 1, and Booth sat down with the Journal’s Jack Pitcher to explain why a man who won the argument decades ago felt the need to make it again. When he got out of school in 1971, he said, people fought the index-fund idea: “You’d talk to fund managers or journalists, and they’d say, ‘You eggheads. You don’t understand markets.’”
The message that didn’t land
The eggheads won. That’s not the part that bothers him. “It’s not clear how many people have really got the message about how difficult the market is to beat,” he said. “If you look at the growth in index funds, there’s been similar growth in trading volumes. Some people are trading in and out of these, trying to time the market. And then you’ve got the growth of prediction markets and all kinds of wild investing strategies. We’ve still got room for better investor education.”
That one lands on our desk. This paper prints a prediction-market pulse most mornings and runs an active model book, and Booth just filed the first under symptoms. Fair. Here’s our answer, and you can hold us to it: the core is broad and boring, the satellite is small and deliberate, and the crowd odds we quote are weather, not a forecast. Anyone who can’t tell you which of their positions is the core and which is the satellite is running the wrong book. The equal-weight S&P 500 (RSP) we added Sept. 1 is Booth’s argument in a ticker — five hundred companies, one weight each, no opinion about which one wins.
Uncertainty is the product
“The book is not about how to invest; it’s about how to think about investing,” Booth said. “There’s a lot of anxiety right now, but if people better understood how markets work, they’d be far more likely to invest and stay invested. If there were no uncertainty, there’d be no risk, and all investments would yield the exact same riskless return. Uncertainty creates the opportunity.” On the index’s tilt toward technology and AI, his fix is geography, not cleverness: “If you hold half your money in the U.S. and half internationally, a large part of that concentration risk goes away.” As for AI, he said, nobody knows the eventual winners. “Think back to the 19th-century gold rush. Who was the big winner? Levi Strauss did pretty well. It wasn’t necessarily the gold miners themselves.” Levi Strauss (LEVI), for the record, still trades.
March 2020, and every other one
“Every down market I’ve lived through over 55 years triggers the same reaction,” Booth said. “People see the market down 20% or 30% and think, ‘I better get out.’ What we try to explain is that markets price in bad news rapidly to reach a level where expected returns are positive again. When bad things happen to firms and individuals, they don’t just sit there and take it. They figure out how to get back on track.” Thursday offered the mirror image. The S&P 500 closed 0.7% from a record because one Fed governor, Christopher Waller, said one sentence about being inclined to hold rates. Three sessions earlier the same market had priced a 58% chance of a hike. Markets price in good news rapidly too, which is the other reason timing them is a coin flip with a fee attached.
Why write it plainly, for people who don’t read fund prospectuses? Because of who never invested. “My parents grew up in the Great Depression and lived through World War II,” Booth said. “They never really invested in public markets and they probably had a more difficult retirement than they should have. They viewed themselves as outsiders, and thought the insiders would take advantage of them and take all their money. And so they never invested. Today, if you get the market return, you’ve done about as well as the pros. That’s a miracle, I think. We ought to have a ticker-tape parade for that kind of conclusion.” We’d march in it. We’d just bring the statement.