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David Booth on the Value of Flexibility


David Booth on the Value of Flexibility

By David Booth Executive Chairman and Founder


We’ve long known that flexibility adds value. My colleagues Bob Merton and Myron Scholes became Nobel laureates for their work on option pricing. The option to act when beneficial is worth something.


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.

DISCLOSURES

The securities identified do not represent all securities purchased or sold for client accounts. It should not be assumed that an investment in the securities identified was or would be profitable.

The information in this document is provided in good faith without any warranty and is intended for the recipient’s background information only. It does not constitute investment advice, recommendation, or an offer of any services or products for sale and is not intended to provide a sufficient basis on which to make an investment decision. It is the responsibility of any persons wishing to make a purchase to inform themselves of and observe all applicable laws and regulations. Unauthorized copying, reproducing, duplicating, or transmitting of this document are strictly prohibited. Dimensional accepts no responsibility for loss arising from the use of the information contained herein.

“Dimensional” refers to the Dimensional separate but affiliated entities generally, rather than to one particular entity. These entities are Dimensional Fund Advisors LP, Dimensional Fund Advisors Ltd., Dimensional Ireland Limited, DFA Australia Limited, Dimensional Fund Advisors Canada ULC, Dimensional Fund Advisors Pte. Ltd., Dimensional Japan Ltd., and Dimensional Hong Kong Limited. Dimensional Hong Kong Limited is licensed by the Securities and Futures Commission to conduct Type 1 (dealing in securities) regulated activities only and does not provide asset management services.

This information is intended for educational purposes and should not be considered a recommendation to buy or sell a particular security. Named securities may be held in accounts managed by Dimensional.

Robert Merton provides consulting services to Dimensional Fund Advisors LP, in his capacity as Resident Scientist of Dimensional Holdings Inc.

Myron Scholes is an independent director of the Dimensional ETF Trust and Dimensional’s US Mutual Fund Boards. Dimensional’s US Mutual Fund Board refers to the DFA Investment Trust Company, DFA Investment Dimensions Group Inc., Dimensional Investment Group Inc., and Dimensional Emerging Markets Value Fund Inc.

UNITED STATES: Dimensional Fund Advisors LP is an investment advisor registered with the Securities and Exchange Commission.