The transcript from this week’s MIB: Dave Butler, Dimensional Fund Advisors Co-CEO is below.
You can stream/download the full conversation, including the podcast extras on iTunes, Bloomberg, Overcast, and Stitcher. Our earlier podcasts can all be found on iTunes, Stitcher, Overcast, and Bloomberg.
This is Masters in Business with Barry Ritholtz on Bloomberg Radio.
RITHOLTZ: This week on the podcast, I have an extra special guest. His name is Dave Butler and he is the Co-CEO of Dimensional Fund Advisors which manages about $600 billion. Dave has really a fascinating background not only academically but in the professional sports world and the arc of his career over the past, let’s call it, 30 years, very much tracks the development of many of the dominant trends that have taken place today in finance. So, whether it’s independent advice or indexing or multi-factor investing, he has been a part of, let’s just call it the movement, dimensional funds is very much a culture-driven, philosophically-driven firm that he’s been a large part of for a long time not only does he work with his Co-CEO, Gerard O’Reilly, but he also works closely with Chairman David Booth directing dimensional funds into the latest iteration of where finance is going.
If you are at all interested in independent advisory, asset management factor based investing, sustainable-based investing, I think you will find this conversation to be absolutely fascinating. So with no further ado, my conversation with Dave Butler.
My special guest this week is David Butler. He is the Co-CEO and Head of Global Financial Advisor Services for Dimensional Fund Advisors which manages over $600 billion. Dave got his BS from Berkeley and his MBA same place in 1990…
BUTLER: From Berkeley. Yes, sir.
RITHOLTZ: …before he decided to play around with round ball a little bit. Dave Butler, welcome to Bloomberg.
BUTLER: Thank you. Very appreciated.
RITHOLTZ: So, let’s talk a little bit about pre finance career. You play basketball in college and you were drafted by the Celtics.
BUTLER: That’s right. Yes. So I was drafted by the Celtics back in 1987…
BUTLER: ..and the year I got drafted oddly enough they had a strike, an NBA player strike, so normally as a player you get a chance to go try out…
BUTLER: ..and they can tell you whether you have a shot to make it or not. Unfortunately, they didn’t have a tryout that particular summer so I made a decision to go over to Turkey…
BUTLER: …and play my first year in Turkey. I had a — I was actually a young kid just sitting around the house in the summer and (inaudible)…
RITHOLTZ: I know, I’ll go to the Middle East to play ball.
BUTLER: My agent called and said, “Hey, Istanbul wants you to come over and try out.” And, I had been in great shape, I was getting ready for the Celtic camp. I went over to Turkey and they offered me twice what I would have made as a rookie in the NBA.
BUTLER: And I thought to myself I wasn’t sure when the NBA strike would end, so I thought, “Well, I’ll go over to Turkey. I’ll work on my game. I’ll get better. I’ll make my first year’s worth of money and then I’ll come back and I’ll make the NBA the next year and make to Celtics and…”
RITHOLTZ: But fate intervened, didn’t it?
BUTLER: Fate intervened and I think it was about halfway through my season in Istanbul I end up tearing a — we call it a gastroc which is your calf muscle. So the muscle that connects your calf to your lower leg and I…
BUTLER: …I sat out for probably about a week. When you’re the American player on a — the European team like in Istanbul, there’s one American per team…
RITHOLTZ: Yes. Is that by rule or…
BUTLER: …in Turkey, that was the rule.
RITHOLTZ: Is that a minimum or a maximum?
BUTLER: The minimum and the maximum. It’s the only number you can have. So, there’s one player — one American per team and the expectation, of course, if you’re that one player is that you need to lead the team in scoring, you need to lead the team in rebounding, you got to be the main person. So, when I got back to the States after my injury, my doctor said it was probably a two to three-month sit-out type of an injury.
BUTLER: And I was out for about a week, they taped me up, and I kind of faked my way through the rest of the season.
RITHOLTZ: And that was — you did a permanent damage.
BUTLER: The downside is I did a little bit of permanent damage to my calf and I never really quite got back to where I thought I could actually make the NBA.
RITHOLTZ: Yes. Normally, at that age you’re fairly immortal and recover pretty quickly. This had to be — was this a practice injury or an actual game injury?
BUTLER: It was actually a practice injury, so it’s kind of one of those up and back drills.
RITHOLTZ: Yes. Yes.
BUTLER: And then I stopped and get ready to take off and I heard this big snap and…
RITHOLTZ: You heard it?
BUTLER: …yes, other people in the gym heard it too and I thought my Achilles had snapped.
RITHOLTZ: Right, because you — I’ve watched…
BUTLER: Because that’s what you always hear.
RITHOLTZ: …I’ve watched basketball games and when you hear that pop, someone from the Knicks, I’m trying to remember who it was tore their — was it — maybe it was the ACL.
RITHOLTZ: You heard it pop on television. It’s a horrifying sound…
BUTLER: It’s a terrible sound.
RITHOLTZ: …because you know exactly what it is.
BUTLER: Yes, you know it right when it happens, you know you’re done.
BUTLER: So, yes, that was it. That was the moment when my leg kind of just limited my potential. So, I always thought I was a good enough player. I played enough positions and I did enough things well. I didn’t ever do anything super, super well, but I was good enough to — I think, at my peak, in my highest level at 100 percent I could be the kind of guy that could collaborate and be on a team, and basketball well and…
RITHOLTZ: The sixth man off the bench, is that what you’re thinking?
BUTLER: Yes. I could tip, and I could rebound, and I could do that sort of dirty man kind of work on the basketball court that coaches appreciated.
RITHOLTZ: The Charles Oakley, Dennis Rodman role?
BUTLER: Yes, I was…
RITHOLTZ: How tall are you?
BUTLER: I’m about six-nine.
RITHOLTZ: Oh, so you could bang in the inside.
BUTLER: Yes, a little bit more, maybe a little bit more outside of — we had to score…
BUTLER: …in Europe I had to be able to shoot from the outside and three-point line had just come into the existence at that time, so the three-point line wasn’t part of the game like it is now. So, I didn’t really shoot threes, but I could — I was a good mid-range scorer. I could rebound, I could dunk, and I could jump pretty well. People used to think of me as a kind of a high flyer kind of inside type of person, so that was always a big part of my game.
RITHOLTZ: And your brother played professionally as well.
BUTLER: Yes. My brother Greg is a bigger guy. He’s about a seven footer.
RITHOLTZ: Oh, really?
BUTLER: So this is my — I call him my little brother, but he’s seven-foot — he played at Stanford. I played at Cal. And so he and I actually played against each other in college. We actually…
RITHOLTZ: Berkeley versus Stanford.
BUTLER: Berkeley versus Stanford, like UCLA versus USC in the Bay Area kind of thing.
BUTLER: And we actually guarded each other, so we were on the court playing against one another at the same area at the same time.
RITHOLTZ: Which I imagine you did — I imagine you did that growing up anyway not unfamiliar with banging bodies with your brother.
BUTLER: Yes. Yes. No, we played all day long. We had a — like every other kid, we had a driveway, front yard, we had a basket up on the garage.
BUTLER: And we played. I had an old brother, (Mike). I do have an older brother, Mike, that — he’s about six-four or six-five.
RITHOLTZ: So he’s the runt of the litter.
BUTLER: He’s the runt to the litter, but growing up people used to laugh because they look at the three of us growing up. We’re all about a year and a half to two years apart, but we’re all the same size growing up. So the people thought we’re triplets possibly, because there’s no size difference.
RITHOLTZ: Oh, really? That’s very funny.
BUTLER: But he the — he was a tougher guy. He was more physical, so I used to play against him quite a bit and played him in the front yard all day long. And, we used to go at it pretty well.
RITHOLTZ: So, you had to be thinking beyond a career in sports, because not only you go undergraduate at Berkeley but you get your MBA, was it business or finance? What were you interested in when you were in school?
BUTLER: Yes, well my dad was an accountant and he was always a business finance guy and so…
RITHOLTZ: Also a tall person?
BUTLER: He’s six-three.
BUTLER: So a decent size, but he was always very focused on academics, so he — regardless of all of the athletic accomplishments or acknowledgement, he never really paid much attention to that. He always talked about school, and books, and…
RITHOLTZ: “Nice shot but what’s going on in your math class?”
BUTLER: …yes, and that’s been, “What are you doing in class and so forth?” So I was sort of geared in that direction anyway and I think when I finally made my college decision, it came down to Cal, Stanford, and Harvard. Those are my final three choices. So, obviously, there’s some academic aspect to those three names that clearly weren’t basketball shops necessarily. They’re really great academic station.
RITHOLTZ: You got into Stanford, you got into Harvard, but you chose Berkeley because of the basketball.
BUTLER: Right. I had a — the story goes, I went on a weekend visit to each one of those. I went — I’m a California kid, Southern California, I went to Harvard. It was — it happen to be 10 degrees, and snowing.
BUTLER: And I just sort of scratched my head and I just — it couldn’t contemplate being out there in that weather and I thought I was going to be back in California anyway. So I came down to Cal Stanford and I went to Stanford for the weekend and when out — went to two movies and sat around the dorm. It’s super boring at the time for me. I went to Cal and first night there I went to toga party at a fraternity house. I thought that was great. I went to a football game the next morning with great sun and a lot of fun people around. We went to San Francisco that night and I came back and I told my mom and dad and I go, “I think this is where I want to be. It’s going to be a great place to play basketball and enjoy myself as a student.”
RITHOLTZ: That’s very funny. You have a unique vantage point because not only where you are an athlete in college and professionally, but you work in finance and the question that I have to ask is how is it that there are so many horror stories about athletes frittering away all of their money? They have it stolen from them. They have managers who don’t really do what’s best for them. They are fairly reckless. Why is this?
BUTLER: You know it’s funny, David Booth the Founder of Dimensional and I talked about this all the time, because we’re both big basketball fans. I think it’s — success comes really early to athletes.
RITHOLTZ: Very young, very immature.
BUTLER: Very young, very immature, and oftentimes you, and I will include myself, you feel invincible. So, athletically you’re bigger, you’re stronger, you’re faster, you can — the idea of being 30 or 40 or 50 years old is — doesn’t even seem plausible at the time. So, the idea of actually thinking into the future and then saving or trying to be conservative about how you spend and so forth is just not something that comes to mind at my time and I think that’s part of the issue. I just don’t think the maturity level is there to be able to differentiate how and why you would actually make a plan from a financial perspective into your future.
RITHOLTZ: Yes. There was a huge sports illustrated article, I don’t know, maybe 10 years ago or…
RITHOLTZ: …and the numbers about the NFL are horrifying, and the NBA, and Major League Baseball not all that much better, has that changed at all or athletes becoming a little smarter about their money or is it still the same sets of temptations and impulses?
BUTLER: Well, I’ve been doing this for 25 years now at Dimensional and I just — I had the same discussion I did 25 years ago as I did today.
BUTLER: Because people ask me that as an old athlete. “How do you change the energy and the momentum around athletes and their future in terms of finance?” And, it’s just — I think, it comes back to — there’s an ego aspect. There’s a mentality that this is never going to end. But to your point if you look at the NFL, I think the average career is three years.
BUTLER: I think NBA is something on the order of two to three years. And when you think about how long this these careers after the — athletic career is going to last…
BUTLER: …it dwarfs anything athletically. But to get that message across to a young kid I think is really tough. My personal perspective on it and I talked to David Booth about this as well as I think the NCAA with college athletes ought to put some forward — sort of a trust fund together with the money they’re making off in the NCAA tournament and so forth. Put a trust fund together that’s not touchable, not available until age 25. And at age 25 once a kid has had a chance to go through the professional process, maybe they get injured like I did, and they start looking around and they think, “This Athletic thing is not going to happen.” Then, that’s the moment when I think — a trust that would allow them to go back to school, go back to get a grad degree, et cetera, et cetera, would be really, really valuable.
At 21 or 20, this is not going to happen, because, again, they’re invincible, and they can’t imagine that they’re not the one that’s going to go and play a professional sports. I can tell you every, every player on my Cal basketball team, all 12 guys thought for sure that they were the one that was going to go play in the NBA.
RITHOLTZ: The whole business.
BUTLER: And it’s frankly because all of them were Allstate, and All-American, and all of this, and all of that, so there’s a lot of ego into it. There’s a lot of parental ego. I see that now with my kids.
BUTLER: The parents I think are so enamored with sport and with the notoriety, if you will, that comes from athletic success that they get involved and they get energized by the whole thing and I think that’s problematic as well. So I, with my kids, I try to just say, “Look, it’s all about school just like my dad is, it’s all about academics. If you happen to be a good basketball player or I happen to be a good volleyball player…
BUTLER: …God bless you, that might help you get into a better school, but it’s never going to be about that. It’s going to be all about academics.”
RITHOLTZ: You seem terrifically rational and reasonable. We mentioned the length of careers. You’ve been doing this for 25 years, tell us how you transition from sports into finance. How did you end up on Wall Street?
BUTLER: Well, you’re a New York guy, so I think you’ll get a kick out of this story. So, I had gone — well, I’ll step back, I had started my MBA as a basketball player in college. So, I happen to have a knee injury in my junior year of college and what that allowed me to do was it allowed me to start taking grad classes my last year while I had eligibility. So, I started my MBA, I had gone off and I wanted to find out if I could play professionally. So I’ve gone to Istanbul, to Turkey. The following year I had gone to Japan, but there’s a window I think of five years to finish up your MBA once you started it, so I’ve decided I would go back. Because of my calf injury I’d go back and finish up my MBA at Berkeley. And so I did that and like every athlete, I still had the bug. I thought I could still do a little something.
BUTLER: So I end up going to — on my last year I went to England, to Birmingham in the U.K. and I that was about — I went for about two months and I realized that my leg was still as bad as it’s ever been. I knew my career was done. I had mentally pretty much checked out. I had actually interviewed with Merrill Lynch back in my time at the — doing my MBA at Berkeley. And at the time they said, “Well, we don’t have a spot for you right now, but we’d love to keep in touch. We think we have a spot for you.” So long story short, two months into it, I’m sitting in Birmingham, England, and my mom calls, and said, “A gentleman from Merrill Lynch just called and wanted to talk to you.” So, I got on the phone with him and he said, “We got a spot for you on the desk here in New York. We’d love to have you join. When can you start? This is Saturday afternoon…
RITHOLTZ: See you on Monday.
BUTLER: …see you on Monday.” So I basically — I got — I called my brother who has — had been with the Knicks, seven-foot-tall, and I said, “Hey, Greg I’m going to fly in Sunday.” I said, “I got to borrow a suit, because I don’t have one.” So, I borrowed a suit from my brother, Greg. I showed up in the office on Monday morning and that was my “transition” out of athletics and into my career, so a lot shorter than most people.
RITHOLTZ: How long did you work in New York for?
BUTLER: Well, I was, I’d say, about seven years total. So about I think three and a half years with Merrill Lynch and I came back with Dimensional for another four years or so.
RITHOLTZ: In New York?
BUTLER: In New York. We actually had an office in Stamford, Connecticut.
RITHOLTZ: Yes. And then when did you move to — was the HQ in Boston back then or…
BUTLER: No, it was in Santa Monica.
BUTLER: California, yes.
RITHOLTZ: Oh, really, and then now it’s a — I believe it’s Boston and isn’t there a new office opening up on the East Coast, right?
BUTLER: Yes, we’re opening up in Charlotte in February of next year, 2019.
RITHOLTZ: And is that going to be the new headquarters or like a satellite?
BUTLER: We’ll have basically two large headquarters. So, Austin will hold 1,200 people, Charlotte will hold about 600 to 700 and we still have an office in Santa Monica in California. We have about 150 people there.
RITHOLTZ: What was your initial role at DFA and how did this eventually become Co-CEO?
BUTLER: Well, I was, just a long story short, is I was at — here in New York and I had decided that I was going to get out of financial services. I didn’t want to necessarily be in the industry from what I kind of saw and I felt, and I decided I was going to go and be a teacher and a coach in California.
BUTLER: So, I’ve mentally decided I was going to move back to California. I was sitting on the desk one day. I was reading The Wall Street Journal and I saw an ad that said, “Money Manager, Santa Monica, California.” And, I thought, “Why not? I’ll just send a resume just in case.” You have one more option and it turned out that that Santa Monica, California firm was dimensional Fund Advisors.
BUTLER: And so I think I was on a Christmas break back in 1994. I flew out to California. I went to their offices to do an interview and I met a gentleman named Dan Wheeler.
BUTLER: And Dan was the first Financial Adviser to use Dimensional Funds in his practice. He’s an independent advisor working through Schwab at the time and he was running the business for Dimensional. And Dan sent me down basically and I had what I — we call the aha moment. He just sat me down and said, “Here’s how the capital markets work. Here’s how we think. here’s what an independent adviser is. Here’s how they act as a fiduciary to the client. That combination is one that we think is the right answer for the end client and one that hasn’t been delivered to clients in financial service space.”
And I remember I walked out of that office and I thought to myself, “I could be part of this. This is something that’s really interesting and exciting to me.” And I went up and had lunch that day with Merton Miller who was a Nobel Prize winner.
BUTLER: David Booth had another appointment to go to, so he asked Dan to take Merton Miller to lunch with him and Dan said, “Sure, but I got this new guy here, Dave Butler, that will have to go with us.” And David said, “That’s fine.” And, so I sat there at lunch with a Nobel Prize winner in finance Merton Miller and he talked about all of those really simplistic financial concepts like — he just say, “Diversification is your buddy, cost matter, markets work, prices are efficient,” et cetera, et cetera. And I just had this kind of epiphany of what I thought the capital markets could deliver and should be and then how that’s coupled with the independent advice, a story from Dan, and I thought, “Man, this is a place where I think I could spend some time.”
RITHOLTZ: Fascinating. The firm manages over $600 billion and we were talking about how you joined the firm and really sort — has a very different type of firm from the bigger bulge bracket firms that you had been used to in New York, how did that lead to your arc of your career at Dimensional Funds? What did you start doing and where did it take you?
BUTLER: Well, I started out as a, we call it Regional Director, so that’s a person that works with advisors out in the field.
BUTLER: But, I think the key point for me is as I’ve mentioned earlier, on Monday morning I walked into Dimensional’s offices and had this interview, and Dan Wheeler was terrific, and he said, “Why don’t you come back the following Monday and start?”
RITHOLTZ: Just like that.
BUTLER: And, we didn’t talk about any compensation, we didn’t talk about what my title would be, we didn’t talk about any detail other than the — this idea that this concept, this mission, this energy that he was putting towards this approach around clients was what he felt good about, and basically over the following week as I read and thought more about it, I felt really good about it as well. So, I really joined what I would call kind of a mission rather than a job and it was a passion for all of us and we thought that we could change the way financial services were delivered in the country and that was sort of our mantra and our energy in the early days and people ask me, “Why would you start without any detail around what were you going to do?” And I said, “Well, it was that moment in my life in my career where I wanted to do something that I felt really good about and really passionate about and I didn’t really worry about the monetary aspect or anything like that.”
RITHOLTZ: Yogi Berra said when you come to a fork in the road, take it and you did.
BUTLER: There you go. There you go.
RITHOLTZ: So, we really helped create a fascinating aspect of the way Dimensional Funds operates and I want to spend some time on that. Instead of going straight to retail, the decision was made and he really pushed this from the outside in. “Hey, why don’t you have the advisors be your advocates and deal directly with them and literally waged a door-to-door campaign starting in -” I guess, California, right? Is that really where he was operating?
BUTLER: Yes. Yes.
RITHOLTZ: How did this go from an idea to effectively the business model of Dimensional Funds?
BUTLER: And, again, all of it goes towards Dan’s creativity and imagination, but his view, he was a broker for many, many years, and he felt that the industry in essence was conflicted in a sense that products would be developed and delivered by the industry, and then it would push — be pushed to commission salesmen and those commission salesmen would sell that product to clients.
BUTLER: And he thought the better way to do that was to flip that around and change that in a sense that — as he became an independent advisor, he worked for the clients. He worked in their best interest. He worked on their behalf and he changed the model to say, “Hey, this client would basically sit at this top of this deck and then this advisor, this independent advisor would be working for that client.” And then that advisor would make decisions as to what was the best solution, investment solution for the client in, again, in their behalf and in their best interest. So, it was a change in the model, this independent advice model was something that was very, very different that nobody had ever seen really in the financial services space where we were really used to having product developed and being pushed as sold commission type product.
So that was a big change, Dan had that idea. He also liked the idea of indexing as we like this idea of low cost diversification, tax efficiency, if you will. And he was using an S&P 500 fund in his practice and he had come across Dimensional small cap fund, which was called the micro cap fund.
RITHOLTZ: The original fund that the Ethan (ph) company put out.
BUTLER: The original fund. The original fund, it was called the 910 fund at the time when I started, but it was…
RITHOLTZ: 910, why was it called 910?
BUTLER: 910 as in the ninth and 10th deciles.
RITHOLTZ: Got you.
BUTLER: So the bottom 20 percent of stocks, if you will. So that was the portfolio that he was interested and he came to David Booth and to Rex Sinquefield and he said, “I’d like to use these portfolios with my clients.” And to their credit, David and Rex said, “Well, this is — that’s retail money. Our expectation on retail money is that it’s hot.” Meaning, that if market…
RITHOLTZ: In and out.
BUTLER: …markets were good, they’d come in and if markets were bad it would go back out. We can have that kind of cash flow in the portfolio, so…
RITHOLTZ: Because it’s disruptive and expensive in trading cost, et cetera.
BUTLER: Disruptive and expensive, we’re in the smallest part of the market. We can’t have that kind of trading and we have institutional clients in those portfolios as well. So, Dan came back and said, “No. Listen, we’ve got a different type of a model here. We’re going to go and educate these advisors. We’re going to make sure that they’re long-term buy-and-hold advisors. We’re going to go through a methodical process to get them engaged and understand how we work and why we work, and that money will be compatible to the money that’s already in the portfolio, institutional portfolios.” So that’s how it started.
RITHOLTZ: We’ll make retail look like it’s institution.
BUTLER: Exactly, exactly, and so that’s what (inaudible)…
RITHOLTZ: And how did that work out?
BUTLER: It worked out fabulously well. So when I started, we were about $1.5 billion from financial advisors. Today, I think, we’re $365 billion from financial advisors.
RITHOLTZ: Well over half.
BUTLER: Well over half. It’s been a significant part of the business and the upside too is when you look at what is actually transpired is that the “retail assets,” the individual assets have performed, and acted, and been very compatible to the institutional assets in the fund. So, there hasn’t been a retail aspect to the kind of in and out of the markets based on market performance. There’s been a nice consistent cash flow in 2008-2009, in particular, when the markets were tanking and there’s a lot of fear and emotion in the market. I think there’s $500 billion dollars that went out of the market over a couple year period out of equity mutual funds.
And from Dimensional’s case, we actually had a positive net flows during that time period, positive over that time period, and over each quarter during that time period, and that was because of the advisor’s role, and the discipline that they provided to the client to make sure that that client understood why their assets were invested the way they were, and they were able to keep the emotions intact so that people had a chance at the long term returns that we always talk about of 10 percent for the equity markets. If you’re not in the market full time, you’re going to have a hard time getting those long-term rates of return.
So, the model was really different. It was brand new at that time. The idea of an independent advisor was more of an idea in the national reality and what we see now is we’ve seen a real transition towards this model in a significant way.
RITHOLTZ: Quite interesting. What is it that you have and the firm has educated clients about that allowed them to think about investing for the long-term? And, I know this is hindsight, but I have to point out, if you were a buyer during the financial crisis, well, markets have since tripled, if you were a seller probably it didn’t help your returns.
BUTLER: Yes. I think the concept of meeting expectations is important here. So, when I think about why we had the kind of inflows that we had and the performance that transpired at that time is I think the advisors did a terrific job of educating their clients. And when I say educating, I’m talking about what is it that we expect from the capital markets. So long term if you look back to 1926, equities have returned 10 percent, but there’s a lot of time periods where that 10 percent isn’t realized, and it might be markets that are down 40 percent or 50 percent.
BUTLER: So at the front of what the independent advisor does is they actually do train and they educate the client as to the potential outcomes that they might expect over time. So, when it does happen, they’re not happy about it, but they’re not upset the point where they actually pull their money and decide to do something else. So, there’s a real important aspect here that I don’t think has ever been addressed in a significant way, and that is trying to get people to be more comfortable with the expectations longer-term around the capital markets and the expectations on returns.
RITHOLTZ: Wait. Are you suggesting markets go up and down, is that the implication here?
BUTLER: That happens. Yes. Yes, sir.
RITHOLTZ: So that is shocking. That is not what my broker who used to tell me back in the day. So, let’s talk a little bit about — you mentioned Merton Miller earlier and, obviously, Gene Fama is a big part of the firm. You work with a number of Nobel laureates and other people of equal intellectual heft, Ken French of Dartmouth is another person who has certainly moved the needle when it comes to how we think about where returns come from. What do these various people — what are their roles at the firm and how do they affect portfolio construction?
BUTLER: Well, they’re all fully engaged. So, when you talk about all those names and it’s…
RITHOLTZ: So, it’s Merton Miller, it’s Gene Fama…
BUTLER: Merton Miller, it’s Gene Fama, it’s Ken French, it’s (Bob Burton).
RITHOLTZ: ..and more.
BUTLER: Myron Scholes is on our Board. So we’ve got three or four Nobel Price men that actually are participating in the firm in some respect. So the great thing about this is they all are actively engaged in the business, in some aspect, particularly, with Ken French and Gene Fama. They’re on the investment committee and they participate in all investment discussions around the firm, so that’s…
RITHOLTZ: Is that a little bit intimidating? You want to do something and a Nobel laureate looks at you and goes, “No, a terrible idea.” How does that impact what the process is like or is it more nuance than that?
BUTLER: No, it’s very — what I come back to is and we talk a lot about this at the firm. We talk about models and models are not reality, and models are used to get a sensible view about the way things work. So what Dimensional has always been about and I think this is why we have such a long-term relationship with our end clients is we’re not going to come out with anything that’s fancy or different just to do it for marketing reasons. We have this group of people that look at the capital markets. They’re empiricists. They look at data all day long. What they want to come out is they want to come out with something that’s sensible, that’s reasonable, that’s repeatable.
There’s an aspect to it that from my perspective for advisors and then for their clients is that there’s an expectation that we are going to deliver something that is going to be implemented in a very, very robust way. And that’s, I think, a big differentiator for Dimensional.
RITHOLTZ: So, let’s talk about some of the other popular investing trends, some of which Dimensional has embraced, others you’ve decided to issue. Smart beta is a marketing term. There’s an ongoing debate between Rob Arnott of Research Affiliates and Cliff Asness of AQR. Cliff basically says, “Smart beta is just Fama-French factor investing in a different marketing wrapper.” How do you guys look at smart beta?
BUTLER: Yes. Smart beta is a catch-all phrase for multi-factor investing in certain ways. The way I look at it and I’m definitely not in the academic circles like the Famas and Frenches and so forth, but I look at Dimensional’s existence in 1981. We started with the first small cap portfolio and that was a — that was probably the first multi-factor portfolio that was out there. At ’92 Fama and French introduced the three-factor model and that was when the value portfolios were launched back in 1992. So, what I would say is I think Dimensional has always been, through our connections with academics, externally and even through our internal academic teams, we’ve always been on the cutting edge of multi-factor investing.
But most importantly and David Booth point this out is that we’ve been able not only to recognize the data and the research that is out there but we’ve been able to implement in a very, very effective way. So when you look at our returns and our “body of work” over 36 years, 1981 was the launch of the micro-cap.
BUTLER: We’ve not only been able to capture the multi factor rate of return, but we’ve actually been able to add some value from an implementation perspective. So, it’s a combination of, I think, those two parts. One is great portfolio management and great implementation, but there’s also the great research aspect as well. So, there’s a lot of research out there in the public domain. The question is, “Can you implement on that research in a very effective and efficient way?”
RITHOLTZ: So we know the challenges with small-cap, because of the liquidity issue and you have to really keep an eye on outflows otherwise it’s very disruptive. Let’s talk about one of the other original Fama-French factors which is value. This has been a rough decade for value investing. We know it tends to be cyclical, but how do we deal with the fact that value has been underperforming growth for most of the period following the financial crisis during that, at least, the growth and expansionary period, growth has done really well.
BUTLER: I think there’s always going to be these big trends, if you will, or kind of these movements in markets that reflect well or poorly on a specific area of the market or asset class. So having been around this for 25 years now, you look back at every factor if you will. There’s always going to be moments and periods of time where they don’t actually outperform or have the premium that we discussed earlier.
BUTLER: Equities underperform T-Bills for 16 years from 1966 to 1982. Value underperform growth all through the ’90s until the tech bust in March of 2000.
RITHOLTZ: I recall hearing this Warren Buffett guy, this value investor, he’s lost his touch.
RITHOLTZ: I want to say late ’98, early ’99.
RITHOLTZ: Buffett is washed-up, he’ll never make any money again.
BUTLER: Yes. Yes.
RITHOLTZ: So you go through these periods where a particular style or factor is out of style, how do you counsel advisors and clients to, “Hey, this is a normal part of market cycles we have to stay the course.”
BUTLER: That’s just say that is counseling, it’s education beforehand, and then it’s counseling during, and then it’s a kind of a recognition after the fact. So, you look back at that 1999 period that you’re just mentioning when Warren Buffett was out of favor, when value was out of favor. I think it was in like three months value actually turned around so quickly. Actually, growth dropped through the floor.
RITHOLTZ: Right. Value came roaring back and then some.
BUTLER: Yes, the 10-year number is on value versus growth. Value was ahead of growth as of mid 2000. So you had nine or nine and a half years or nine and three quarters years where growth was just pounding value. And then, within a three-month period, value over that whole 10-year period actually had a better performance in growth.
RITHOLTZ: Wow, that’s amazing.
BUTLER: So, I think, there’s a lot of stories like that, that people can — need to recognize and see and I think we spend quite a bit of time counseling and advisors counsel their clients to say, “Look, we’ve built an investment plan, an investment policy. We’ve allocated the assets in this way. We were confident that you’re in a position that you can withstand ups and downs in the markets or ups and downs in particular parts of the market and if you can stay with that long-term, you’re going to be highly and well rewarded over that time.”
RITHOLTZ: So, what is it that keeps a Co-CEO up at night? What do you think about and what are some of the concerns that you have looking at everything going forward?
BUTLER: Well, I think at a Dimensional level I think for me it’s just our growth. So we’ve grown from $50 billion back in 2003 to $600 billion today.
RITHOLTZ: That’s quite a growth rate.
BUTLER: Quite a growth rate and if you look at that growth rate and whether we’ll match that growth rate the next 15 years or not from a size perspective, one of the challenges that David Booth laid out to the firm in 2003 was, “Look, if we stay on the same growth path that we’ve been on up 2003, we’re going to be $500 billion firm by the end of 2018.”
BUTLER: And here we are at $600 billion and…
RITHOLTZ: That’s a fantastic forecast.
BUTLER: Yes. It wasn’t a, “Here’s the projection and here’s where we want to be.” It wasn’t that. It was more of, “Look, we’re stewards of client assets. We’re stewards of this business. We need to make sure that we have the ability, the infrastructure, and so forth to service those assets in the right way, and do it in a client-centric way.” And, so it was a challenge to all of the managers to make sure our infrastructure was built out in a way that we would be able to do that properly, whether it’s portfolio management or research or trading or sales or whatever it might be. So, I look at that from a dimensional perspective and say we actually have the same growth rate over the next 15 years.
BUTLER: We need to be — have a prepared work team to be able to handle that kind of a change in the size and growth of the firm. So, we’re hoping that from an education training perspective, we’re hoping to build out quite a few things around dimensional.
RITHOLTZ: Does that growth rate eventually have to plateaued? Is the — where does the law of big numbers start to say, “All right, you went up 12X in a dozen years, don’t expect that going forward.”
BUTLER: Yes, there’s a natural way to, I think, plateau, I’m sure at some point. I’m not sure when and where that is, but we do know people consume their retirement and so forth at 4 percent or 5 percent or 6 percent per year. So the bigger the asset base, the larger the outflow is going to naturally be just from consumption, so we recognize that. I think the big issues that I think about on an industry basis is, obviously, wealth transfer so that we’re coming up on a…
RITHOLTZ: Big generational (inaudible)…
BUTLER: …big generational shift. Advisors are thinking about succession planning. Technology is becoming a big question, how do clients and how do advisors access the capital markets and how do they interact with one another when they’re thinking about this client relationship going forward. So, those are things that I think Dimensional wants to be involved in. We want to support the advisor and make sure that they’re as competent and well-positioned as they possibly can be to deliver to clients the right solution over the next 20 or 30 years.
RITHOLTZ: We have been speaking with Dave Butler. He is Co-CEO of Dimensional Funds Advisor. If you enjoy this conversation, be sure and come back for the podcast extras where we keep the tape rolling and continue discussing all things factor-based investing. You can find those wherever finer podcasts are sold, iTunes, Overcast, SoundCloud, and, of course, Bloomberg.com. We love your comments, feedback, and suggestions. Write to us at MIBPodcast@Bloomberg.net. You can check out my daily column on Bloomberg.com or follow me on Twitter @Ritholtz. I’m Barry Ritholtz. You’re listening to Masters in Business on Bloomberg Radio.
Welcome to the podcast, Dave. Thank you so much for doing this. I’ve been looking forward to this for a while. I have a ton of questions I did not get to. So, before I get to my favorite questions, there were a few things I just have to ask you about. What’s your day like? Where do you spend most of your time on? Because I know you wear a couple of different hats and I’m — have a hard time understanding what the day-to-day is like for you.
BUTLER: I’ve been telling friends that have asked me about this Co-CEO role, what’s it like and what do you do on a day-to-day basis. I always tell them I’ve been in the advisor business for 25 years, so as an old athlete it’s sort of like a basketball coach who’s been a coach for 25 years now becoming the athletic director.
BUTLER: And you get to know a little bit about softball, and water polo, and so forth, and so on. So I’m in the stage of actually learning about a lot of aspects of the business outside of just financial advisor space and that’s been a good learning curve. And I think the bigger point for me is that David Booth, Founder and Chairman who — he’s very involved in the firm. So, he, and I, and Gerard O’Reilly who’s the other Co-CEO, we spend significant amounts of time thinking about the business and about where Dimensional needs to fit into the business generally, and how we want to prepare ourselves to be viable partners, if you will, to the advisors out there in the space.
RITHOLTZ: So, let’s talk about volleyball, and water polo, and everything else. You were running the advisor side, does this mean you spend time thinking about institutional, and trading, and accounting, and taxes like where does your line of responsibilities stop? How much are you responsible for and what is Gerard responsible — how does — is it divide and conquer? You sort of split up the fiefdom or do you each work together on different areas?
BUTLER: Yes, people ask that often about Co-CEOs generally.
RITHOLTZ: It’s a tough gig to make work.
BUTLER: It’s a tough gig to make work. I think if you look at Gerard’s background, so he’s a CIO, he’s been at Dimensional for 14 years. He’s a Caltech PhD, so he’s a rocket scientist, so he’s got the right pedigree. He’s an investment guy. He can go toe-to-toe with the Famas and the Frenches talk about investment issues in a significant way. I’ve been — grew up more on the sales side, the adviser side, and so forth. So we’re both involved in the entire aspect, the entire broad part of the firm, but we’re also probably more focused on our individual areas.
BUTLER: The key with Co-CEOs is you got to be collaborative, you got to be open. You got to be transparent and frankly Gerard has been just a terrific partner in terms of just — how do we want to go about the business? What do we see going forward? If we continue to grow and we’re $1 trillion or $2 trillion money management firm, what do we need to do to be ready for that kind of stewardship around assets of that size.
BUTLER: So, it’s been a great collaboration. Co-CEOs or co anything could be problematic if you have people that are political or not really overly engaged in being transparent and collaborative. But Gerard has been terrific with that, and very happy with how that’s worked up.
RITHOLTZ: When we’ve seen Co-CEOs at Fortune 500 companies, it doesn’t really seem to work. There’s perhaps a little too much testosterone in the room to make it work. You guys seem to have found a good rhythm together.
BUTLER: I think that’s right and we both grew up in the firm, so I’ve been here 24 years. He’s been here 14 years. We know each other. We’ve known each other well for all that time and I don’t think there is this — I think we’re maybe Co-CEO go south occasionally as — if you got two people coming from different backgrounds or even different firms, they get squished together.
BUTLER: And then there becomes sort of a political question about who’s going to be the lead, who’s going to do the next guy or gal, and we just don’t have that at Dimensional. And that’s saying I give David Booth a lot of credit around culture. I’m a big culture guy being an old athlete and being on a bunch of good teams, and a bunch of bad teams. For me, it strikes me that culture is the paramount issue around success, you have to have that…
RITHOLTZ: I’m glad you brought that up. So let’s — we could talk about sports, but it’s really just a giant metaphor for business.
RITHOLTZ: Are bad team — do bad teams have bad culture because they lack talents or does bad culture lead to talented teams becoming bad?
BUTLER: I think it’s a combination of both. But I think it — culture starts with leadership and culture starts with expectation, culture starts with a view that the leadership says we are going to be a team and we’re not going to be a collaborative team, and we’re going to have success doing that. So, it’s — I think it’s vision. I think it’s — we always talk about stories. You listen to a particular story about a particular team or about a particular company and those stories go a long way in terms of setting the culture around how things work or don’t work.
I’ll give you a quick example, David Booth did a video a while back and just as a side kind of tossed him — somebody asked him about his childhood and how he — what his first job was and he basically told the story about his first job being a shoe salesman in a small town in Kansas and he said, “I used to sell shoes to women and basically if the shoe didn’t fit, I tell them that it didn’t fit and that they should come back another time.” And so the…
RITHOLTZ: So that career didn’t last very long.
BUTLER: The career didn’t last very long. But it laid down — it made a point which is it’s about the client, it’s about doing the right thing for the client, doing what’s best for them, and when somebody says a story like that, and people hear that, it resonates culturally around the firm. And so I think Dimensional is very, very unique in that respect. I can’t imagine being somewhere for 24 years without feeling really good about what we’re trying to accomplish. And back to my story of meeting Dan the first time I said, “I think we’ve been on a mission. I think the mission has been about delivering the right client experience and doing it in a good way. We’ve never been worried about goals or getting it to a certain size. It’s always been about, ‘Hey, if we do the right thing, do it well.'”
The success or size, whatever it might come from it is going to happen on its own and it’s sort of the John Wooden analogy, which is just you prepare yourself, you tie your shoes, you work on certain things, and then you go into the game, and the expectation is you’re going to win. But if you don’t win, it’s OK because you prepared yourself. You’ve done as best you can. You worked hard at it and you’ve delivered what you said you were going to deliver.
RITHOLTZ: And I think somewhere along our interview, I should disclose my firm manages assets and we are also a Dimensional client. So, I’m very familiar with both your process, your portfolios, and your culture, but I wanted to make sure that that is out there so people understand this. You mentioned David Booth. In public he is a sort of quiet reflective person, but I’ve interviewed him, I’ve had lunch with him, I get the sense that internally and dimensional he’s a little more of a boisterous Chairman. What’s it like working with him?
BUTLER: Oh, David is great. I’ve worked with him now for 24 years and he’s a super insightful guy. He’s a very modest guy. When we talked about even our body of work and the fact that Dimensional has had this portfolio out there for 36 years and outperformed the benchmark by 140 basis points for 36 years. Those are the types of things we haven’t necessarily talked about quite often enough in my view. I think the idea of our competence in our body of work, I think those are the things that I think could be elevated from a dimensional perspective.
But David is a very modest guy. He’s super insightful, very strategic. He makes great business calls very, very quickly. So I’ve been around him long enough to know when David makes a comment about a particular business situation, his insights are very, very good, and they usually are very, very right. So, he’s a great voice to have. He’s a great person to have around. I’d also give him credit. I use some of his kind of views on management and how people react. He’s definitely a macro manager, so he’s willing to give people a chance, i.e. Gerard and myself.
RITHOLTZ: Delegate it to you guys and let you carry the ball.
BUTLER: He’ll participate. He’s been a great Chairman. He’ll act. He’ll participate in big questions and big strategic issues. He’ll keep a close eye on what’s happening and make sure that he sees things happening in the way he thinks they should. But he also is very good about giving somebody some space to run with an idea that he thinks is pretty positive. And going back to the advisor business, Dan Wheeler was the guy that came in with an idea to use these funds with advisors, i.e. the retail business, and David to his credit contemplated that concept and thought about it thoroughly around it, where these assets could be compatible. He made a decision to allow Dan to go do that in a methodical way that would be different than what’s been out there in the past. I give him a lot of credit for that.
RITHOLTZ: Now, Dan was essentially an independent advisor outside of Dimensional Funds, but it was pretty clear he was raising a lot of money for the company. At what point did that relationship become much more explicit if that’s the right word?
BUTLER: Yes, I think he became an employee, I think, a couple of years into it, so maybe ’91 — 1991, 1992. So Dan is an interesting guy and he was a broker in his prior life and he would say — he would use a term like never having to say you’re sorry approach to investing. So he failed as a commissioned broker or a stock broker that he felt there’s a lot of times when he’d go and pitch a stock to a client and then the stock wouldn’t do well and he’d have to go back and say, “Hey, I’m sorry it didn’t work out the way we expected.” And so his view was if you could move away from that, you could get a client educated on capital markets, get them very comfortable about the expected returns in a market, and educate them in a proper way that you wouldn’t have to have these, “Oh, I’m sorry,” type of conversations with your clients. It was a very unique way to view the that’s my space.
RITHOLTZ: So you mentioned David Booth doesn’t really discuss the company’s achievements publicly all that much. The firm has a reputation as a kind of private company that doesn’t do a lot of press. I mean, we don’t see your names out in the media all that much which I get the sense is by design. But it leads to lots of misconceptions, what sort of misconceptions are out there about Dimensional Funds?
BUTLER: Well, I think we — I don’t know if it’s purposely or not, but I think we’ve always allowed our clients to talk for us. So, if you or any other advisor or institutional client thinks positively of what we’ve been able to do for them, and for their clients, then they’re going to speak highly of us, and that’s a way, that’s a public presence kind of a concept as well. So, we’ve always sort of limit ourselves in the public presence type of space. We’re not advertisers. We’ve talked to clients in the past. They don’t necessarily want us to advertise. They don’t mind having an elevated public presence, so when Bloomberg does an article on Dimensional, an advisor is able — a third party piece, an advisor was able hand that article to a client, and the client says, “Oh, OK. I get a little bit — better sense of who Dimensional is.” That’s a positive for that client, and for advisor, and for the dimensional.
So, we’re in a business of trying to do the right thing for the client, being very robust from an academic perspective and research perspective. Working on the edges, if you will, from an implementation perspective and we think our implementation, and our delivery of the portfolios are as efficient as they can get, and that’s probably a part of the story that we don’t we don’t describe enough, differentiating ourselves versus competitors.
RITHOLTZ: So let’s talk about some of those competitors. If we look at the big three in the world of indexing and ETFs, Vanguard, State Street, BlackRock, they have become fierce competitors in the ETF space which is growing very rapidly. You guys have made the decision, “No, we don’t want to be in the ETF space. It’s subject to inflows, and outflows, and it’s very retail, and not necessarily our interest. Is that something that might be revisited in the future or — because it seems like so much of the business is moving in the direction of ETFs, how does DFA think about that?
BUTLER: Yes. I think we’re very client-centric. So, we’ve had discussions about ETFs with clients for many years. As a matter of fact I think it’s probably 10 years ago where David Booth and I went out and talked to clients about their interest and need for an ETF from Dimensional. And, at that point in time there wasn’t that high of an interest for that and — but that doesn’t mean that we wouldn’t review it again if, for whatever reason, advisors, for instance, came back and said, “Listen, it would be great to have an ETF for these reasons and we think you’re the right firm to do that.” Then, obviously, we would be — we would listen to that and be approachable around that. So when you look at our orientation around our various funds, I mean, we have sustainable funds and social funds and…
RITHOLTZ: My next question in my mind that I want to go to, I mentioned the smart beta trends and you guys have really stepped with — stuck with just pure factor investing, how do you look at the rise of ESG, the desire for fill-in-the-blank environmental sustainable social governance what have you, how does Dimensional look at that trend and the desire for that, especially, from women investors and from younger millennial investors that seems to be where a lot of demands is coming from.
BUTLER: Yes. That’s a great question and it’s a great example of how we’ve worked with our clients in the past. Basically, clients came to us and said, “Listen, when you look at those areas, ESG and so forth, the options out there for the advisor weren’t that great. So high expense, highly concentrated, bad performance, and so forth and so on.” So, the question was, “Could you, Dimensional…”
RITHOLTZ: Other than that, it’s terrific.
BUTLER: Yes, that is terrific. Could you, Dimensional, come to us with a solution that looked very much like what your solutions are today, but with a focus and a detail around social and sustainable?” And so we went back to the base of the lab and we came back with portfolios that were very highly diversified. They were low-cost. They did recognize a lot of these ESG issues in terms of portfolio management, and we’re able to come back with a portfolio that we thought from a capital market perspective made sense for the end client with a nod towards being sustainable or social or whatever the issue might be.
So that that’s been a huge success for us. I think we’ve now got 10-year track records in those areas and those portfolios track really closely to our standard portfolios, the core portfolios. So the performance has been terrific the expectations have been met. And for clients and for advisors who are interested in that aspect of investing, they’re available options for them. So we feel really good about that and we think it’s been a real success for all sides and going forward I’m sure there’s going to be more interest in that from clients and so forth on a go-forward…
RITHOLTZ: So what else might there be more interest in going forward? ESG is clearly on the rise, but its roots go back decades. Smart beta perhaps not as far back, factor investing even further back, what do you imagine the next big trends in investing is going to be, and I honestly don’t know if there’s an answer, but you have a different advantage point, maybe you see it a little differently.
BUTLER: There’s always going to be another academic paper or another area of research that helps us refine how we think about the capital markets and we’ve seen that recently with profitability, for instance, so there’s going to be more of that. For me, I think, the bigger change and I’ve been really inspired by recently is I think this — I would call it the human element of advice…
RITHOLTZ: Yes, behavioral finance…
BUTLER: …it’s the behavioral — it’s the advisor’s contribution to the end client result that comes from this interaction at a human level. So, when I sit with advisors now, the concept of trust has elevated quite a bit and trust comes from a couple different areas. One is competency. So at Dimensional’s level, we got to be able to deliver access to capital markets in most efficient way and I think we have. We’ve got a 36-year track record of competence. For the advisor, the advisor provides a lot of different wealth management activities. They know the client intimately. They know about their hopes, and their dreams, and so forth. And so when I think about the movement of financial advice, it’s gone down that path where historically 35 years ago when I started the business it was about trying to sell a stock or get a commission off of a stock purchase or sell.
It’s changed to a holistic wealth management view. It’s changed to start thinking about people’s hopes or dreams or children or charitable giving and doing that in a very systematic efficient way from a capital market perspective, using building blocks like Dimensional delivers to be able to execute on the clients expectations. And so I think by executing on client expectation, the aspect of trust develops and it continues to build over time and so I see these great relationships. I’ve been in this for 25 years and we got advisors who worked with us for 25 years and their clients who’ve worked with them for 25 years.
BUTLER: And when you see those types of clients come into the office and talk about their experience, their journey, the fact that they feel OK about their investments and about their retirement and where they want to go in the future and how they’re…
RITHOLTZ: That’s a great feeling.
BUTLER: …it’s an amazing feeling and so whenever I get — you wake up some mornings and you would ask, “Can I — this is another day of doing X or Y.” It just takes one conversation with a really satisfied client that makes you feel like, “Hey, I got it.” The original reason why we started this was we wanted to make the client experience great. We wanted clients to feel good about their retirement and feel like they’re going to be OK. And when you get to see that through the advisors who are working with these clients for long, long time periods, it’s just a — it’s really a feel-good kind of a thing anybody that works in that space.
RITHOLTZ: So I’m going to assume that we’re not going to see a DFA crypto funds launching anytime soon.
BUTLER: You will not.
RITHOLTZ: So I like the idea of holistic asset management. It’s a good term and it really does a nice job describing the full 360. So, let’s jump to our favorite questions that we ask all of our guests. Tell us the most important thing that we don’t know about Dave Butler.
BUTLER: Great question. There’s probably a lot that you don’t know about Dave Butler, but…
RITHOLTZ: I know a lot more now than I did earlier today.
BUTLER: That’s true. Here’s one, because it’s pretty relevant. So I — Steve Kerr just won the NBA championship with Golden State. I think he’s gotten eight rings now.
RITHOLTZ: Yes, right. As both the player and the coach.
BUTLER: As both players and coach. He and I played together on a U.S. national team back in the day. We got the room for a month together.
RITHOLTZ: No kidding.
BUTLER: And I have to say I’ve taken a lot of inspiration from watching him coach a team of major talents but taking that team of major talents and developing them and knitting it into a collaborative unit is just genius. And I don’t know if people give him the kind of credit that he should get, but it’s an amazing thing to watch. I read stuff about him quite often. I take it…
RITHOLTZ: Do you laugh about it?
BUTLER: No, I take it to my team.
BUTLER: I say, “Look, here’s something that we ought to think about and here’s something we got to view and look at as well.” So quick example is just on hiring, I can remember asking him when he played the University of Arizona, these teams were great, the players that I had met were great people, and I said, “How does that happen?” And, he says to me — he says, “Well -” he said — Lute Olson who was the coach at the time he says, “We have an approach where we bring a player in for the weekend and on Monday morning we get together as a team and Lute ask the question, even if he’s the number one player in the country, he says, ‘Do you guys want to play with this guy?'”
BUTLER: Yes, and if we said, “No.”
BUTLER: Then, he’ll stop recruiting him.
BUTLER: So, I actually took that into our team at Dimensional for some time and we had the same kind of approach. We had nine or 10 people interview a new team member and it never was my decision, then I pass it to the team. We start with the youngest person first and we’d say, “Hey, do you want to play with this person? This is a person that’s going to be on your team that you have to play with and do you want to do it or not.” And so that’s, I think, a great way to think about building out a team. You want to find ways to elevate the collaboration and the enjoyment of the team.
RITHOLTZ: That’s really quite fascinating and they are building what looks like a dynasty for the ages.
BUTLER: A franchise, yes.
RITHOLTZ: Right? For sure. Tell us about your early mentors, who changed the way you look at the financial business and investing?
BUTLER: Well, you mentioned the University of Chicago connection. So, I would include all of those folks, the Booth, Fama..
RITHOLTZ: Booth, Fama, (Thaler)…
BUTLER: …French, Merton Miller. I got to meet Merton when I first interviewed and all of those folks have transformed the capital market experience and the investor experience in ways that are — were unimaginable at the time. But the whole — the energy, and the passion, and the enthusiasm for the fact that that markets work, that prices are fair, that you got to invest in a way that’s diversified, and low-cost, and tax efficient, those concepts didn’t even hit the radar screen 25 to 30 years ago. It wasn’t sort of poopooed and laughed at. And now, we push forward today and this — when you talk about independent advice, you talk multi factor investing, you talk about holistic wealth management, those concepts are front and center for any client experience. So to see that transform and I know that these guys were part of that and really elevated this is really fun to watch.
RITHOLTZ: Let’s talk about everybody’s favorite question. Tell us about some of your favorite books be they fiction, nonfiction, finance-related, non-finance, what do you read?
BUTLER: I am all about the biography, autobiographies about the journey I love, just understanding people and how they got to where they are, and why they’re — why they act the way they act. So some of the books that I’ve read recently, I read Shoe Dog, Phil Knight…
BUTLER: The Nike — I just read Bruce Springsteen’s Born to Run.
RITHOLTZ: I have that. That’s in my queue and I haven’t gotten to it yet…
BUTLER: Great book.
RITHOLTZ: …because it’s so big.
BUTLER: So big, but…
RITHOLTZ: It’s a little intimidating.
BUTLER: It’s a great, great book, but all of these things really to me it’s about the struggle.
BUTLER: It’s about the journey. People see “success” from people and what you’ll realize and this is what I’ve told David Booth even with Dimensional, people look at Dimensional and say, “Well, what a successful firm, and how amazing, and how great.” But, there are time periods when the concept of indexing wasn’t even — wasn’t accepted by anybody.
BUTLER: There’s a time when small cap stocks, back in the 1980s, when small caps underperform for 10 years…
BUTLER: …of the S&P 500 by 10 percent that…
BUTLER: …that people question whether Dimensional as a firm was really a firm they could deliver small cap stock returns. So there’s always going to be a struggle along the way, but what’s inspiring to me is to watch how that struggle then translates into an action that then leads to this — the success that we’ve seen, so it’s fun to watch…
RITHOLTZ: You mentioned Shoe Dog, what was so surprising in that book is how many times Nike just managed to miss the executioner’s axe. They were on the edge repeatedly in the early days of the company.
BUTLER: Yes. Yes.
RITHOLTZ: Give us one other book. One other thing that you read and really enjoyed.
BUTLER: Well, anything John Wooden. I read that stuff all day long.
RITHOLTZ: Give us a title.
BUTLER: John Wooden, the life — there’s a book that –its John Wooden, but it’s — John Wooden, I think, and I tell the kids this all of the time, if you look at what John Wooden stands for and how he built his pyramid of success and what’s involved in the pyramid of success, my view is if you follow that in a conceptual way, it’s tough not to have success in something. And success meaning that you’ve given your all and you’ve worked at it and even if you don’t win or lose, the knowledge, and satisfaction, and worked really hard on something I think is success in itself.
RITHOLTZ: Yes, really interesting. What has you excited today? What are you really jazzed about in 2018?
BUTLER: Well, I’d come back to the aspect of trust in the financial services space. I think a lot of trust was lost back in 2008 and 2009, but I think this — I think what we’ve come out of that segment of time in is that I think holistic wealth management has taken its position. I think independent advice has gained its rightful spot. I think indexing, i.e. and then multi-factor investing which again — which Dimensional has been doing for 36 years I think that’s front and center. So, it’s satisfying to me to look at all of these trends that…
RITHOLTZ: Go in your way.
BUTLER: That we identified 30 years ago, that we thought — and, again, we didn’t identify them for marketing reasons or for business reasons. We identify them because we thought that was — we thought independent advice, and multi-factor investing, and holistic wealth management, and human element of the advisor, the necessity for the advisor to get great results for client, we thought that was the right thing for the end client and that’s what’s — is played out.
RITHOLTZ: So tell us about a time you failed and what you learned from the experience.
BUTLER: Well, failure like we all — I’ve failed many, many times and I — the lesson I give the kids is, “Look, you’re going to fail in terms of losing or getting beat or getting knocked down or whatever it might be and the question really is, did you prepare yourself to succeed as best as you could, and if you did not succeed as in, i.e. a loss, did you get back up and dust yourself off and do it again?” So, I think that’s the lesson you’ll learn from failure.
RITHOLTZ: You mentioned, did you prepare yourself to win. Giants coach, I’m drawing a blank on his name, Tom…
BUTLER: Tom Coughlin.
RITHOLTZ: …Tom Coughlin wrote a book Earn the Right to Win, which is that exact — I find a lot of sport books don’t really — they tend to be a little cliché, they don’t really apply to business all that well. That book more than any other that I’ve read really talks to exactly what you’re describing. If you were prepared, if you have done the heavy lifting beforehand, well, then you just go out and do what you know how to do. And if the wind comes great and if it doesn’t, go back to the drawing board and start over.
BUTLER: Yes, absolutely and I think and have the passion. Find something that you’re passionate about, because at the end of day, if you fail and you get knocked down, if you’re passionate about something, you’re going to keep coming back until you get to that “success” platform.
RITHOLTZ: What do you do for fun? What do you do outside of the office that you are passionate about?
BUTLER: Yes, well, I think my fun now, my knees, and ankles, and stuff from basketball are probably a little banged up. So I do catch and shoot for the or I catch and pass for the kids, the boys. But I play sand volleyball, so that’s sort of my passion. My two daughters play sand volleyball now. It’s nice on the legs. I can get a good workout at my age and feel good the next day and not feeling too banged up.
RITHOLTZ: Two-man, four-man, how many…
BUTLER: Two-man. I’m still playing two-man, so…
RITHOLTZ: That’s an exhausting game.
RITHOLTZ: I used to play that back in my youth.
BUTLER: Yes, that’s a challenge.
BUTLER: I try to playing two men as many years as I can. I love to get to 60 and still be playing two-man. That would be a good — an ultimate goal for me.
RITHOLTZ: So let me ask you a question, you mention the kids, if a millennial or a recent college graduate came up to you and said they were interested in the career in financial services or asset management, what sort of advice would you give them?
BUTLER: I just read an article flying out here yesterday that was really great. It was a commencement speech. It was a guy, I can’t remember who it was, but his basic line was, “Grab a mop.”
BUTLER: As in, don’t be afraid to do the hard work, don’t be afraid to do the dirty work, don’t be afraid to “come at it” every day with your best effort, because what’s going to happen and I told the younger people, the Millennials around Dimensional is, “Look, people are going to look at how you work. They’re going to look at your optimism, your enthusiasm, your energy, and when opportunity comes and a name pops into their head for that opportunity, it’s going to be the person who’s done just that, who’s worked hard, who’s enthusiastic, who’s optimistic, who’s smart, who’s collaborative, all that stuff. So, you want to put yourself in a position to get “lucky” by preparing yourself and doing things well and hopefully somebody sees you and taps you on the shoulder and says, ‘You know, Barry, this is the person that we want to have run this or we wanted to have this person go to and do that.'” And, that’s where success in career comes from.
RITHOLTZ: So what is it that you know about the world of financial services today that you wish you knew 25 years ago when you were first starting?
BUTLER: Well, I think the aha moments for me was I got a hold of this thing called The Matrix book.
RITHOLTZ: Yes, I’ve seen it.
BUTLER: The Matrix book is a book that basically shows the returns of the capital markets over time. And so, the lessons that I learned from that — in business school, you don’t look — you learn about discounted cash flow and how to how to price a stock and whether you should buy that stock or you should sell that stock short. That’s one aspect of finance but the broader aspect from an investment perspective for the average person from my mom, how does my mom get comfortable with — that she’s going to be OK in retirement. Well, she needs to know about just the simple averages, the simple averages that come with capital market returns. She also needs to know what you just point out earlier with value or size or the markets in general is that return is not going to be there every year.
So there’s a lot of lessons around a big picture backing off and understanding what is the stock market return, what is a small cap stocks return, what a large cap stocks return, why would you diversify internationally, why would you have fixed income instead of equity. And, all of that goes into this big puzzle that I think the — again, the advisor do a great job of sitting down and providing the human element. Understanding the client in a way that a stock broker 30 years ago wouldn’t and couldn’t. They’re having those conversations now and they’re part of that person’s life to be able to help them deliver on the experience that’s going to be the right one for the client.
RITHOLTZ: Absolutely fascinating. Thank you so much for being so generous with your time. We have been speaking with Dave Butler. He is Co-CEO of Dimensional Fund Advisors. If you enjoy this conversation, well, be sure and look up an inch or down an inch on iTunes, Stitcher, Overcast, bloomberg.com wherever finer podcasts are sold, and you can see any of the other 200 plus such conversations we’ve had. We love your comments, feedback, and suggestions. Be sure to write to us at MIBPodcast@Bloomberg.net. I would be remiss if I did not thank my crack staff that helps put together these conversations each week.
Madina Parwana is my Audio Engineer/Producer who keeps me on time and on track with these conversations. Taylor Riggs is my Booker Producer. Michael Batnick is our Head of Research. I’m Barry Ritholtz. You’ve been listening to Masters in Business on Bloomberg Radio.