From the basketball court to the investment arena, Dave Butler is on the hunt
In the 1987 NBA draft, the lanky Southern California native and star student-athlete from Cal Berkeley was drafted by the Boston Celtics. A player strike led him to play professionally in Turkey instead, where, toward the end of the season, he suffered a worrying calf injury. He played another year in Japan, but the leg pain worsened. He boarded a flight for the U.S. and, from the window, watched his basketball career drift away.
So, I repeated the question: Wasn’t that a crushing experience? Does the disappointment linger, eclipsing any setbacks you experience now?
But over the hour I spent with him, I learned Butler is a personal and professional ballast. Now co-CEO of Dimensional Fund Advisors, he is applying lessons from the court and game plans from his best coaches to the global fund manager’s stewardship of $575 billion and nearly 1,500 employees. And for Butler, reacting to emotion is — like investment risk — something to be prudently managed.
Below are excerpts from our conversation.
The past two years have been interesting, to say the least, in financial markets. How would you say investors generally have handled it?
When I think about investing and I look back at the last two years, a lot of it has to do with, in essence, a repeat of what we’ve seen over many, many decades. The repeat is in what I would call the behavioral area of investor experience. And that’s really two areas: One is greed, and one is fear. We’ve seen both of those emotional reactions attached to investing the last couple of years.
In my view of over 30 years in investing, you can have great vehicles, you can be diversified, you can have low costs, you can be tax-efficient — but you also have to have that capability to control the behavioral emotion that comes with investing. Again, that lines up usually with the two key areas of fear and greed.
Your reaction to that is what really determines your outcome as an investor.
How did different generations of investors react to the market conditions of the past two years?
I’d come back to the same emotions — they’re really the same generation to generation. To me, the question is: How does the reaction to that emotion come about?
This generation, for example, has better technology. So, in essence, they have a quicker trigger on reaction to that emotion.
In certain ways, technology has made things much better — lower cost, more efficiency, you can make trades on your phone and do it in real time, and so forth. The downside of that is that the ability to minimize emotion is lessened because of the speed and the quickness of the technology.
When you react to an emotion, my view has been that’s not a positive for an investor’s returns long term. You trigger transaction costs. You trigger taxes. You’re in and out of the market, when there’s an expected return on stocks over time. If you’re out of the market, you’re basically taking yourself out of that expected return premium.
So, there are a lot of negatives to the reaction and the quick trigger that we see with certain technology today. It probably makes things a little bit tougher for today’s investor, and particularly if they don’t have a coach — a counselor or a mentor who can help them react in the proper way to those emotions.
How have you seen financial advisors respond?
When I look back at 30 years ago, the environment was transactions; it was commissions. It was advisors looking into crystal balls, making predictions about the future — i.e., a stock or the stock market — and hoping to get you to trade. That was the definition of advice!
What I’ve seen over the last 30 years, and particularly I think it showed up the last two, is this redefinition of investment advice. The advisor now, in most cases, is a fiduciary — they’re acting in the best interest of the client; they’re sitting on the same side of the table as the client. That’s been a real positive.
But the big aspect of the client-advisor relationship that goes understated is just that ability to discipline, to coach, to calm fears or minimize greed. Because of technology, that role has been elevated.
There is more of what we call investor pornography — newspaper stories and magazine articles that suggest you need to do something about something.
The advisor is there as a stopgap to any kind of quick reaction that the investor might have.
Why do we keep hearing financial advisors talk about personalization and customization? What does that actually mean?
I think the nuance and the intricacy of the investor’s planning issues have been heightened over time. There’s a lot more focus now on tax, on estate planning and charitable giving, on retirement, 529 plans, and so forth. So, there’s a much broader set of opportunities for the advisor to get involved with a client, and really dig into the hows and the whys of their money matters.
The conversations are a lot more intimate than they used to be. The old transaction environment was about the advisor telling you about a stock and hoping you’ll trade on it. Today’s advisor is much more of the counselor, the coach, the confidant — somebody who’s in tune with the intimate goals and dreams of the investor. That’s where customization ties in — advisors with both the tool set and the ability to individualize at that level make the experience much, much better. That’s the elevated advisor experience.
So, the best advisors are the ones who listen the most, who are the most creative in their interactions with the client, who have the most often contact with the client, who have those intimate conversations about what the client’s goals and aspirations are not only for themselves, but for their family and their various generations.
Customization’s rise is why we added ETFs at Dimensional. The ETF rule that came out in September 2019 basically said you could do customized baskets, and that allowed us to get into the ETF business in a value-add way. We also added a separately managed account program that, again, just gives the advisor one more tool in the tool box and allows for this customization that clients expect.
You were a professional athlete; now you’re co-CEO of a huge investment firm. Have you found the two experiences to be similar in any ways?
I think there are a lot of parallels between the two. I’ve taken a lot of mental notes along the way of great coaches and great leaders that I’ve known and seen through the years.
A couple of the big areas that have been important: One is simplicity.
The best leaders are super simple — they have one, two, three things that they look to do well, and they repeat them over and over again.
Clarity becomes very important within an organization that has everybody rowing in the right direction. I had a coach at Berkeley who was really clear about what he wanted from the team: play defense, play hard, play together. And there it is, 35 years later, I can still repeat those three things. That shows how often he said it and we heard it. It’s what I now try to bring to my own management style: summary, simplicity, and energy.
The other area is team play. My approach is all about collaboration. What can I do to make the other person look better? If you have an organization with a lot of people who act that way, you’re going to have a lot of success as an organization.
The way your athletic career ended must have been hugely frustrating. Do you find that as a result, nothing in your finance career fazes you?
Yeah, I talk with the team about that a lot. In life, you have to be persistent. You have to control what you can control.
In my mind, as long as you come to work — or to the court, or to the field, or wherever you’re going to do your work — and you do it hard every day, and you improve just a little bit every day, then you’re going to be fine in the long run.
What do you look for when you’re hiring?
I tell my kids this all the time: First, come in with energy. Second, build up a body of work that suggests that you are willing to put in the effort, the time, and the hard work. Those two things in combination are going to get you a long way. Then, on top of that, we hope the people we’re looking to hire are very creative, as well as optimistic in nature.
I had a boss in the early stages of my career who, when I would walk into her office, would say, take something off my desk and bring it back better than I expect. I still think about that — if you can do that, and if you can do it repetitively, you’re going to get that next opportunity when one comes up.
Has the skill set required for success in investing changed over time?
The skill set has elevated. When you look at the ability to deal in the quant spaces, for example, the people who are coming in now are just getting better and better.
But I also think you can’t get away from the simple standard.
I look for characters with character.
The character part is un-negotiable. And characters mean you’ve got all kinds of different people, who are going to bring different personalities and styles and approaches. You want that diversity. What you don’t want is a lack of character in them.
You’ve mentioned your kids a few times — you have four. Do any want to follow in your footsteps and be professional money managers?
It’s a good question! I think they might. But my view as a parent is to put things in front of them, then allow them to make the call as to where they want to take it.
Messenger's Note: Evolution - it is in all of us