David Booth launched Dimensional Fund Advisors (DFA) in 1981 from his two-bedroom apartment in Brooklyn, purchasing it for $75,000. The initial setup saw his spare bedroom serve as the headquarters, the dining room as the conference room, and the kitchen as the staff canteen. A crucial piece of early equipment was a refrigerator-sized Quotron machine, providing real-time stock prices, which hummed in the apartment.
DFA's early success was significantly bolstered by research from Rolf Banz, a protégé of Myron Scholes, who demonstrated that while small-cap stocks were more volatile, they offered superior long-term returns compared to large stocks. Banz's study of the 1926–75 period showed an average annual return of 11.6% for smaller stocks, contrasting with 8.8% for large stocks. This finding provided solid evidence for DFA's small-cap fund, emphasizing diversification and greater long-term returns, a concept later known as "smart beta" or "factor investing." This research was brought to Booth's attention by Eugene Fama.
The firm experienced rapid growth, with its inaugural fund returning nearly 29% in 1982, significantly outperforming the S&P 500's 14.7% gain. By early 1983, DFA's assets under management were approaching $1 billion. Despite some challenging periods, such as a seven-year stretch where small caps underperformed the S&P 500, Booth remained committed to DFA's investment philosophy, which posits that small-cap stocks are riskier but offer higher expected returns. The firm recently reached a significant milestone, achieving $1 trillion in assets under management, and subsequently grew to manage $1.1 trillion.
