David Booth on the Value of Flexibility

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.

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Robert J. Pyle, CFP®, CFA is president of Diversified Asset Management, Inc. (DAMI). DAMI is registered as an investment adviser with the U.S. Securities and Exchange Commission (“SEC”) with its primary place of business in the state of Colorado. DAMI will only transact business in other states to the extent DAMI has made the requisite notice filings or obtained the necessary licensing in such state. No follow up or individualized responses to persons in other jurisdictions that involve either rendering or attempting to render personalized investment advice for compensation will be made absent compliance with applicable legal requirements, or an applicable exemption or exclusion. References to registration with the SEC do not imply any endorsement or approval of the qualifications of the firm, nor do they imply that the firm’s representatives have attained a particular level of skill or training. To contact Robert, call 303-440-2906 or e-mail info@diversifiedassetmanagement.com.

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