Investment lessons from David Booth

David Booth is Executive Chairman of Dimensional Fund Advisors that he founded over 40 years ago. It now manages more than $600 bn for investors across the world.  

Gambling is not investing, and investing is not gambling: Gambling is a short-term bet. If you’re picking stocks or timing the market, you need to be right twice — in an aim to buy low and sell high. Fama showed that it’s unlikely for any individual to be able to pick the right stock at the right time — especially more than once.  Investing, on the other hand, is long term. Investing, to me, is buying a little bit of almost every company and holding them for a long time. The only bet you’re making is on human ingenuity to find productive solutions to the world’s problems.

Embrace uncertainty: Over the past 100 years, the US stock market, as measured by the S&P 500, has returned a little over 10% on average per year but hardly ever close to 10% in any given year. The same is true of dozens of other markets around the world that have delivered strong long-term average returns. Stock market behaviour is uncertain, just like most things in our lives. None of us can make uncertainty disappear, but dealing thoughtfully with uncertainty can make a huge difference in our investment returns, and even more importantly, our quality of life.

Implementation is the art of financial science: The way to deal with uncertainty is to prepare for it. Without uncertainty, there would be no opportunity. We always emphasize that risk and expected returns are related, which means you can’t have more of one without more of the other. Make the best-informed choices you can, then monitor performance and make portfolio adjustments as necessary. Come up with a plan to get back on track in case things don’t go as expected. And remember, you can’t control markets, so try to relax knowing you’ve made the best-informed choices you can. Great implementation requires paying attention to detail, applying judgment, and being flexible.

Tune out the noise: If an investment sounds too good to be true, it probably is. Stress is induced when people think that they can time markets or find the next winning stock. There is no compelling evidence that professional stock pickers can consistently beat the markets. Even after one outperforms, it’s difficult to determine whether a manager was skilful or lucky. Consistently finding big winners is difficult, but everybody can have access to the expected returns that a diversified, low-cost portfolio can generate.

Have a philosophy you can stick with: It can be difficult to stay the investment course during periods of extreme market volatility. We will all remember 2020 for the rest of our lives. It serves as an example of how important it is to maintain discipline and stick to your plan. By learning to embrace uncertainty, you can also focus more on controlling what you can control. You can make an impact on how much you earn, how much you spend, how much you save, and how much risk you take. This is where a professional you trust can really help. Discipline applied over a lifetime can have a powerful impact.