Better than indexing?
Wow! That is one strong three-word statement that piques interest immediately.
This is a high bar indeed because index funds in general have a superb long-term track record of outperforming their competition.
This short video packs a mighty and profound wallop at the end when David Booth, Founder and Executive Chairman, Dimensional Fund Advisors says, “If we didn’t do better than index funds, we wouldn’t have a business.” How can Dimensional make this claim you might ask? Common sense, egos checked at the door, faith in the efficacy of market pricing and a keen ability to consistently find a never-ending stream of ideal trading partners is largely its explanation.
David Booth: Let's talk a little bit about indexing, and the tremendous impact it's had on the investment business. The first indexed fund we know of started back in 1971 with Mac McQuown, one of our Directors, and also with Myron Scholes and Fischer Black urging him on. Indexing, it's really the first major investment idea to come out of empirical research. Starting in the mid '60s there was growing evidence about the performance of professionally managed funds and how they didn't seem to do better than random selection, so that led to the creation of index funds.
Back in 1971 when Mac started his first index fund, I had the good fortune of working with him on that. People had the craziest ideas that it was impossible to do, that it was un-American, all kinds of crazy ideas. But now we've had over four decades of experience and each of these decades, the simple S&P 500 index fund would have outperformed most managers, I think most often ending up in the top quartile or even top decile sometimes. The basic idea of indexing has been an overwhelming success, both for the managers that created the funds and, fortunately, for the clients.
Dimensional built the firm on the idea that we could do better than indexing, and that's the way to evaluate us, I think. We have ... Do we do better than index funds or not? If we didn't do better than index funds, we wouldn't have a business.
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