One company seems to think so…

98% of active managers can’t outperform the market. Perhaps you’ve heard this.

I’ve always told clients not to try and outperform the market because they will almost always end up failing.

But my thinking was challenged.

A few colleagues and I attended the Foundations Conference in Austin, TX in June 2018 to learn about how this company has been trying to outperform the market for 30+ years.

From their website:

“Dimensional Investing is about implementing the great ideas in finance for our clients. We aim to beat the market, not outguess it.”

I’m not recommending Dimensional Fund Advisors. I simply want to present a few things I learned. This post won’t appeal to a majority of my readers but I if you’re in finance or have thought you could outperform the market, it may be applicable.

What is Dimensional Fund Advisors?

Their focus is the wisdom of academics over the experience of active fund managers. The DFA philosophy boils down to using academically sound research to consistently outperform the market. Here are a few things I picked up on while I was there that makes them different.

Value Stocks

1. History shows that some riskier stocks — those of small companies and those considered undervalued — produce higher returns on average over time than other types of stocks. 

“But on average doesn’t mean every year,” says David Booth, CEO of Dimensional.

DFA employs what’s considered value-based investing. You have two types of stocks. Growth stocks (overvalued in price) and value stocks (undervalued in price). DFA screens out many growth stocks and underweights them so they have more exposure to value stocks that are underpriced.

Small-Cap Stocks

2. They also overweight small-cap stocks. A small-cap stock is a company with a market capitalization (shares outstanding x price per share) of less than $1 billion.

Small-cap stocks are riskier and because of that, you would expect to earn a higher rate of return by investing in small-cap stocks over a long period of time and underweighting large-cap and mid-cap stocks.


3. Dimensional employs what they call momentum. When they see momentum in the market they take advantage of it, even on a daily basis. If they see movement in certain sectors of the market they will buy and sell to profit from the momentum.

DFA illustrated how they make small trades on a daily basis instead of one big trade every quarter which is what most index and mutual funds do.

High Profitability

4. The other dimension that they try to focus on is finding high profitability stocks. Companies that are generating a lot of cash will potentially have a higher return versus accompany that may be slowing down in their earnings.

When you combine all of these factors to your investments, theoretically what should be able to outperform the market. If you’re investing in value stocks, buying a good price, finding the momentum, and focusing on high-profitability, based on history you should have a higher return than the market.

Index Investing on Steroids

They preach active management can’t outperform the market. They say they’re not active managers, but they are.

We went to dinner one night with Dimensional Fund Advisors and I asked them, “with all of your research and scientific strategies, how do you keep yourself from becoming active investors?” They said, “David Booth, DFA CEO considers them active managers.”

Anytime you deviate from passively investing in a market index by definition you are an active investor.


Learning about DFA’s investing approach challenged my thinking. But I’m not sure I 100% buy into it. Their fees are still a little too high and at the end of the day, it’s really hard to consistently outperform the market.

They have received some heat for the past few years because they haven’t been able to outperform the market here in the U.S. But they’re sticking with their philosophy and only time will tell if they can deliver what they preach in the future.

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