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How often have you thought about making major change in your career. You're going to give up some time, some effort, a lot of education, and potentially a lot of money. But if it pays off in the end, then it's a worthwhile thing to be true to yourself. On today's Out the Money, let's speak with William Bernstein. He began his career as a medical doctor, a neurologist who discovered he had a knack for investing and investment research, eventually
opening Efficient Frontier Advisors. He is also the author of multiple books, The Intelligent Asset Allocator, Four Pillars of Investing, Investors, madeim Festo, and on and on. His most recent book is The Delusions of Crowd Bill Bernstein, welcome to add the Money. Let's just start with a quick question.
You went to medical school. Did you expect to spend your whole life as a doctor?
Heaven No, at least I didn't expect that that was going to happen. But you know, I happened to live in a country that doesn't have a functioning social welfare system or safety in it, and so I realized I was going to have to invest in save from my own retirement. And I went about it in the way that I thought any scientists would do, which is to read the peer reviewed literature, a basic textbooks, collect data,
build models. And that led me into finance and eventually led me into writing about history, because you really can't do finance unless you have a good working knowledge of the history. And I found that I enjoyed reading and writing about it.
So this began, as you thinking I need to plan for my own finances. What was the aha moment that, hey, I now have a new knowledge base and a new skill set. Maybe I could share this with other people.
I'll give credit to a guy you may have heard of named Frank Armstrong, who was one of the early efficient market passive indexing gurus. He was another financial advisor, and after I had built some of my models, he said, you know, Bill, you need to put all this stuff online. You've got a basic text book that you wrote. You need to put that online as well, which he had already done. You know this is we're talking more than thirty years ago. And you do that and pretty soon
you find that you're getting called by journalists. You're getting called by other investors, and one thing leads to another and the next thing, you know, you're managing money and writing books.
So what was what was the moment when this went from I need to take control of my own finances to hey, maybe I don't want to be a neurologist anymore. Maybe my career lay in managing money for other people.
Well, there are two kinds of doctors. The overwhelming majority of the doctors probably you know, sixty seventy percent of them realized by age fifty or so that it's a tough game and they're going to get.
Very tough and it's gotten worse, hasn't it.
It has not gotten any easier, that's for sure. And they're going to get out of it as soon as they can afford to do it. And you know, and then a third of them are the kinds of you know doctors, God bless them who love what they do and get carried out first at age seventy eight or so,
and I fell into the first category. So when the opportunity came to do something that, you know, put mean too contact with very intelligent people all day long, having fun conversations and dealing with fun concepts that I left at the chance.
So at what point did you say, Hey, this is going to become financially remunerative and I'm not just giving up a well paying job, although it comes with a lot of student loans and obligations in debt. How long did it take you to reach that point where, oh, I can make a go of this.
It took about three or four years from the time the first book came out, and you know, it became a parent that I could make a decent living managing money in writing. You know, I mean, who doesn't want to make your living? You know? Writing? I mean that's everybody's dream job. And I fell into my lap.
I guess, okay, so A, you're preaching to the choir, But b most people don't love writing. And what's kind of in interesting is how solitary the process of writing is. And all of us who write in public do so for that back and forth, for that conversation. For you, writing became a pathway to a career change. I had the same sort of experience. Did you have any doubts or fears? How did you manage that?
Oh? My god, I have a full I still have a full blown case of imposter syndrome. Really, Oh my god, yes, of course, Uh you know. I mean I think I told you maybe several years ago about the experience I had of getting invited to a conference that was hosted by the DNI, the Director of National Intelligence, and here I am, you know, with these spokes and four stripers talking about national security. I mean, you know, if that doesn't induce, you know, a full blown case of imposter syndrome,
I don't know what what does. See.
My assumption is that they're bringing someone in from a different field because very often knowledge, adjacency and just seeing the world from a different perspective can provide insights to them.
I mean, with luck, maybe that happened. I don't know that it actually did the way I dealt with it, as I picked the subject which was as remote from modern geopolitics as I can find. So I talked about the strategy of the geostrategy of the Athenian grain trade.
Huh, fascinating. And these guys aren't experts in that sort of history, and they're obviously military and national intelligence repercussions to that. So I don't understand this some imposter syndrome you're you're referring to. But but let's talk about other mistakes. You know, did you when you made this transition? Were their mistakes made? How did you recover from them? How did you get past sort of being a novice with a non traditional background in the world of investment.
Well, you know, before I took started to take finance seriously seriously, I made all the mistakes that rookie investors make. I invested in hot funds, I played futures, and and you know, you know, experience is a fine teacher, so you learn, you learn from those things, and of course I learned, you know, in the past twenty or thirty years, I absorbed certain truths that I really didn't understand when I started out.
I love I think it's Howard Marx's line, experience is what you get when you don't get what you want. That, right, seems seems kind of appropriate. So along the line, what sort of tools did you create? Did you develop systems for managing assets and dealing with clients or checklists? Everybody has their own set of tools they use. What did you create?
Well, I had an interesting experience, which is, you know, very early on, I understood the importance of maintaining a policy allocation and rebalancing towards it. So at one asset quested particularly well, you bought, you sold it to sell it down to its policy, and when it did poorly, you did the opposite. You bought and went back up to your policy. And one of the funds that I used was the old Vanguard Precious Metals Fund, which back in the day was a real, honest to god, low
cost gold and precious metals equity fund. And what I found was that simply by rebalancing it, the internal rate of return I got out of it was about five percent higher than the than the dollar weighted excuse me, the time weighted return. So in other words, I had a positive gap, not a negative gap, and I wanted to know where that five percent came from. It didn't matter how I did it, whether I balanced monthly or quarterly or annually, or I used thresholds year after year
that five percent. Some years it was four percent, some years was seven percent. But an average sum five percent. Couldn't figure out where it came from. So I worked out the canonical math of it. Okay, And if you understand the mathematics of rebalancing where that bonus comes from, then you understand acid allocation, and if you understand acid allocation,
you understand finance. It's just that simple. So that's that was that was sort of that was that was that was sort of the the insight that I had early on that had been able to me to write about finance.
So so to oversimplify that tool. When you're rebalancing, you're selling a little bit of what got expensive, you're buying a little bit of what got cheap. And is that where the magic percentage came from, where the bonus came from.
With precious metals, it surely does. And precious metals is a is a special case. It doesn't work quite as well for the more common, the more common asset classes. But the really nice thing about golden precious metals is
that it is subject to animal instincts. So there are some time periods when you simply can't give gold precious metals equities away, and people are saying, this really doesn't belong in your portfolio anymore, and I would read, I would read experts, you know, talking about, yeah, gold golden precious metals really doesn't belong in your portfolio anymore. And then you have other times when you know the gold bugs are hopping. Uh, the dougs are quacking, and they
have to be fed. And those are the times when you feed them and you sell them and you sell your your your precious metals and your your your your your precious metals equities. I mean, there was a I saw a wonderful article in the journal a couple of weeks ago.
I saw, I saw.
Yeah, and I saw this John Yeah, and well it was that and it was about him and a number of other people. I think it's the same article you're talking about. And I saw a wonderful three word term, which is first time investor. Anytime you see first time investor, uh, you know around then ascid class, you know that things are getting really propty.
So the funny thing is, as soon as I saw that journal article that referred to after the big short where Paulson it was really one of his lieutenants is the guy who created that bet. Paulson just was the owner of the firm, and Pat Baghini Paganini is the guy who had done that bet, made an ungodly amount of money and rolled it into gold. And that was fifteen years ago, and the journal is saying the trade is finally working out. I'm like trade, it's fifteen years.
The SMP has out performed gold over the past fifteen years by like five x. How is this anything but a disastrous trade. That's a little less disastrous.
Yeah, it's funny that you mentioned that, because almost exactly fifteen years ago, Jason has Wagge interviewed me about Ron Paul's portfolio, which was very heavy in gold and precious metals. Now, the article came, i believe at the end of nine to twenty eleven, when gold was coming off of a.
Run of very high nineteen hundred and change or so, if memory serves.
Yeah, and you know, Jason and I just got absolutely flamed in the comments section of that article. It verged, you know, pretty much towards over anti semitism in spots and you know, Jews and gold and all that, and that was that was a pretty good marker. And that was exactly the same time period that you're talking about. You start from twenty eleven, it was a disaster. You start from twenty fifteen. Gold's done very well, thank you.
But gold looked very different in twenty fifteen than it did at the end of twenty eleven.
Huh, it's it's pretty amazing that. I guess I used to think people's definition of long term was too short. Like when someone says, well, I'm a long term investor, I'm an investor for a couple of years, I'm like, no, No, you got to think in terms of decades, and now fifteen years is a trade that is where out It's really kind of amusing. But let's bring this back to your career change. There are very specific skills that you bring to the table as both a medical doctor and
a neurologist. Any of those skills transferable? How did you leverage that? Well?
You would think that being a neurologist would help you with behavioral fiance. It really doesn't, because the everyday practice of neurology has almost nothing to do or relatively little to do with with behavior I the kind of neurology I did is something that's referred to disparagingly in the Greatest Chicken neurology, which is that which is nex and backs okay.
Nex send backs okay, and and d way.
You know, people talk to me about the neurosciences and about all these brilliant people, you know, Konoman and firsty and spa spurry and gazanaga. And what I like to say is, no, those guys are you know Da Vinci and Michaelangelo. You know I was Sherwin Williams. It really didn't. It really didn't help me all that much. Where it did help me with the basic scientific treaming, it brought
me respect for data and for updating your priors. When when the data contradict your your deeply held beliefs, maybe your deeply held beliefs need to be reevaluated.
Well that's always a challenge. So let me throw out a touchy question at you. Doctors have a notorious reputation amongst finance people for being terrible investors. And my pet thesis is their nurses and staff or look up to them, their patients think their God. How on earth can those people bring any level of humility to a world that is so unknown and so challenging. Indexings is in admission. I'm not going to be a Warren Buffett or Peter Lynch. I'm not going to be a stock picker a market
time timer. What's your experience dealing with doctors, because you clearly don't fit that stereotype amongst a lot of financial advisors. No, doctors can be difficult.
That's a fair that's a fair observation. Surgeons tend to be more overconfident than than than than medically oriented positions.
Hey, we're cutting a person open and we think it'll all work out. How can you not be over confident?
Exactly?
And then you know, there's the there's the gender aspect of it as well, which is male doctors are much worse. Uh, most people are happier by the way, with female doctors, probably for the very same reason as one of my neurological colleagues once, a female neurological colleague once told me that testosterone does wonderful things for reflex time and muscle maacks mass, but for judgment not so much. Now, that's
that's happening. It's the overconfidence aspect. But the real reason, and I think actually even the bigger reason why physicians do so poorly, is they do treat it like a serious subject. Okay, you know you wouldn't you know, before you're even allowed you're a patient, you have to master the basic sciences. You know, your anatomy and your physiology and your pharmacology and so forth. And they never bother
to take the time. And the way I explain it to them is without treating finance as a serious subject worthy of academic study, they're trying to do brain surgery by reading the USA today. It just doesn't work.
Huh. That's that's really really insightful. So last question, if someone were going to ask you for advice about undertaking a career change, what sort of advice would you give them.
Well, it's it's a complex bit of calculus, which is that you do have to be financially secure and change your career. Okay. One of my favorite New Yorker cartoons is the typical, you know, homeless guy in the street with the tin cup of his sign says, followed my bliss. All right, so don't don't follow your dress when you're when you're too young. You know, if you have to spend ten or twenty years doing something you don't like to become financially secure. Uh, And you understand that money
doesn't buy things, it buys time and economy. Get that time and economy and become financially secure and then you can do whatever the hell you want to do.
Great stuff, Bill, Thanks, We have been speaking with William Bernstein, co founder Officient Frontier Advisors and author of so many great books on economic history, Birth of plenty, splendid exchange, masters of the word, delusions of the crow of crowds, On and on. You're listening to Bloomberg's At the Money, do.
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