David Booth on the Value of Flexibility
By David Booth Executive Chairman and Founder
That kind of thinking is the background for how Dimensional invests. Our ideas are grounded in academic research, but to successfully go from whiteboard to market requires a nimble and flexible approach, with a process built to make bounded judgment calls along the way. At Dimensional, we are firm in our investment philosophy and approach, but flexible in our application so we can react to changes in markets.
A great example of the value of flexibility is the recent frenzy over GameStop.
GameStop had been on our radar for months before it made headlines in January. Throughout 2020, GameStop was very expensive to borrow, which was likely good news for the investors who benefited from the revenue we earned from lending out our shares of GameStop, but this was also a signal to us that low expected returns may be on the horizon. Dimensional research shows that stocks that are expensive to borrow tend to underperform stocks that are not on loan over the short term. So, our process tells us to stop buying securities like GameStop that have high securities lending fees.
In January, the stock really took off. Our process always considers how stocks fit into our various portfolios. For example, we think small cap strategies should be invested in small cap stocks. When GameStop started approaching $30 billion in market cap, we no longer viewed it as a small cap stock because it had a market capitalization that was bigger than the market cap of almost half the companies in the S&P 500 Index. Our flexible approach allowed us to react, selling out of GameStop in all our small cap portfolios by the end of January.
Flexibility can add value, but how much value depends on the quality of our implementation. We make investment decisions every day, guided by research, core economic principles, and our decades of experience. Not all our examples will follow GameStop’s path. Flexibility plus good judgment can add value.
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