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Chicago Booth Magazine

The True Believer: David Booth, ’71, proves his Chicago smarts by refusing to out-think the market

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A Change in Direction

Eugen FamaBooth returned to the finance course in his second year, this time as Fama’s teaching assistant. He calls the experience “a mixed blessing”—but not, as some may suspect, because of Fama’s legendary directness (Booth calls him “an incredibly honest guy” and “abundantly fair”). Rather, Booth still rues that he didn’t take full advantage of collaborating with the man whose theories changed his own way of thinking and the world of finance in general. “Every afternoon I would go into his office and he’d hand me pages of handwritten notes of stuff he wanted me to work on,” Booth recalls. “I felt like I was taking this guy’s money—he’s working harder than me. I don’t think I’ve met anybody as competitive as Gene in my whole career, and one doesn’t usually think of that competitiveness when you think of professors.” Fama’s combination of drive and brilliance convinced Booth that maybe academia wasn’t for him after all. “He was smarter than I was and willing to work harder—how was I ever going to compete with people like him?” he says. “I thought there must be more like him out there. I didn’t realize he was unique.” Fama took the news in stride, and helped Booth, now with an MBA, find his first job: an analyst at Wells Fargo Bank in San Francisco, where he worked on one of the first index funds with John A. “Mac” McQuown.

Booth’s TA experience with Fama was pivotal for another reason: one of the students in the class was a former seminarian turned MBA student named Rex Sinquefield, ’72. Their enthusiasm for efficient markets thinking was equally avid, and throughout the decade after they left Chicago, they remained in touch. Like Booth, Sinquefield also was pioneering index funds as a trust officer at American National Bank and Trust in Chicago. Many of their conversations centered on their shared and growing frustration with the finance sector’s reluctance to pursue the implications of efficient markets theories, especially when it came to small cap stocks.

By 1981, they were convinced that the entrepreneurial route was the only way to go and they formed Dimensional Fund Advisors.

Rather than be one more management firm to assert they could beat the market through stock picking, Dimensional would base its ability to look at the interplay of all three dimensions “and engineer solutions around it.” The first of these “solutions” was exactly what Booth and Sinquefield had lobbied for unsuccessfully at their previous jobs: a small cap fund that was fully indexed.

Another early move by Booth was to call Fama and ask him to serve on the board of the mutual funds managed by Dimensional, building the brain trust that has become one of Dimensional’s most unusual and frequently singled-out features. In short order Miller, Scholes, and Roger Ibbotson, PhD ’74, also signed on; George Constantinides, Ken French, Jack Gould, and Abbie Smith would join them in the years to come. Only one Dimensional director, Nobel Prize winner Robert Merton, does not have Chicago on his vitae. According to Financial Advisor Magazine, one consultant who has worked with Dimensional described the firm as “an applied think tank from the University of Chicago.”

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