DFA founder on the Value of Flexibility

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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.

By David Booth Executive Chairman and Founder

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.

About the Author Doug Finley

Douglas Finley, MS, CFP, AEP, CDFA founded Finley Wealth Advisors in February of 2006, as a Fiduciary Fee-Only Registered Investment Advisor, with the goal of creating a firm that eliminated the conflicts of interest inherent in the financial planner – advisor/client relationship. The firm specializes in wealth management for the middle-class millionaire.

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