William Bernstein Discusses Neurology and Investment

money manager and book author. Really an amazing um career path and and a fascinating conversation with no further ado. My conversation with William Bernstein. I'm Barry Ridholts, your listening to Masters in Business on Bloomberg Radio. My special guest this week is William Bernstein. He began his career as a neurologist before becoming a financial theorist and investment advisor.

He is the author of nearly a dozen books, many of which cover finance, including The Intelligent Asset Allocator, The Four Pillars of Investing, The Investors Manifesto, and several others. He has also written several works of historical interest including a splendid exchange all about global trade and the birth of plenty, as well as masters of the word. William Bernstein. Welcome to Bloomberg. Happy to be here, Barry. So, I've been looking forward to this conversation for quite a while.

You and I have been emailing for several years. Um, you have such a fascinating background and so unusual. Before you became a professional investor and an author, you're a neurologist. How long did you do that for and what made you transition into finance. Well, I did it more or less for a third of a century. And I transitioned into finance and nonfiction writing by virtue of the fact that I live in a country that doesn't have a functioning social welfare system, and so I had to uh

save and invest on my own. And I approached the problem in a way that I thought that any person with scientific training would do, which is that you examine the peer reviewed literature, You read the basic texts, you

collect data, you built models. And this got me to about the mid nineteen nineties, and by that point I realized that I had created something that was actually of use too small investors, and so I began writing finance, and as I'm sure we'll get into later in the interview, one of the essential skills that any investor should have as a working knowledge of financial history. And I discovered that I enjoyed writing history, and so I segue uh

into that do you miss medicine at all? I miss the camaraderie, I miss dealing, the personal interaction with patients, which is golden uh. And and you know I I missed the knowledge base and the competence that you exert. But the day to day practice of medicine does wear on you after a while. Uh. And there comes a point I think in every doctor's career when or at least most physicians careers, when they decided to call it quits. So one of the things you did you mentioned data.

You assembled an asset class database before they were really a philiple publicly. Uh. Why did you go about doing this? And where did you get your data from? I basically begged people uh for for data uh. And I just collected as many data series as I could, and I wanted to basically create what's called a mean variance optimizer, which is something trades off return and risk measured as standard deviation or variance and as much data as you can throw into that is good. And so that was

why I collected all of those data. Now it turns out that that sort of exercises of fools errand, as I very quickly figured out. But it's still a useful skill, and it was a useful thing to do for small investors. Well, why is it a fool's errand other than the fact that the data is relentless and it never stops, it's a fool's Errand because the output of a mean variance optimized or that is, what are the most efficient portfolios?

Giving you the most return for the least amount of risk or vice versa, giving you the least risk for a given amount of return is extremely sensitive to the data that you put into it. So change the return of an asset class by percent or two in either direction, and it might completely dominate a portfolio or it might completely fall out of the portfolio. These things started to come onto people's desktops UH in the early nineteen nineties,

and when they tossed in historical data, what did they find. Well, they found that the most efficient portfolios were heavy in Japanese stocks UH and precious metal stocks, case closed. That's all you have to know. Uh. And TPS nine was the peak of the Japanese market and has yet to recover those heights since exactly. And what some wags refer you know to to a mean variance optimizer is as an error maximizer. Just for that reason. That's really great.

So so you create a website called the Efficient Frontier. What made you do this and what made you decide to start putting all of your writings up in that one place. Well, I'll give credit to a man by the name of Frank Armstrong who is a financial advisor in Florida. Uh, and he had done pretty much the same thing. He hadn't collected the data, but he was on the web before any you know, financial writing, before anybody else was. And this goes back to well before

and uh, he encouraged me to do it. I had, you know, after I completed the exercise, I wrote a book called The Intelligent act Allocator, my first book, and I approached a bunch of publishers with it, and of course, being someone with no experience and no credentials, you know, just just a manuscript coming in over the trans and it got rejected by thirty thirty publishers, and Frank told me, hey, just put the book on the web, and that's basically how it took off. That was what was your first

published book? If that wasn't your first book, that was it. That was it? So so you eventually got a publisher for that. Yeah. The story is is that a man by the name of Robert Barker, who was a reporter for Business Week, actually came to interview me in about uh and I told him the story and I can still see look on his face as I told him the story about the publishers, and he said, dear God, please tell me that one of them wasn't McGraw hill.

And I said, well, yes it was. And he then owner of Business Week now by Bloomberg LP right, and he hit his you know, sort of made a show of mock, putting his face in his hands, shaking his head. And then six weeks later I got an offer from McGraw hill. He swears he has nothing nothing to do with it, but of course I didn't believe him. That. That's absolutely hilarious. So so, given the nature of data now being ubiquitous, how is this changing the world for

for investors? And for advisors. Well, uh, you know, I think it was Bernard Baruk who said that something that everyone knows isn't worth knowing. Uh, So that if everybody has these data and can operate on them, uh, then they become nearly nearly worthless. Gene Fama makes the point, uh that everybody is basically working off the same data

as you know, going back to basically nineteen six. Uh. And it's you have to be very cautious about different studies that are still using based on the same database, because I think it was Samuelson who said, we only have two hundred years of history. Uh, and that's not the complete that's not the complete sample. I think Roger Ibbotson and the folks said, CRISP just backdated that from six back another hundred and fifty or so years. Not

that there was a lot of data back then. It was, um, a whole lot less companies and a whole lot less trading. But the full run of of publicly traded US companies I think goes back now to the early eighteen hundreds if I'm remember that correctly. Yeah. Yeah, And and there are people who've who've who've got probably far less uh detailed databases than than Rogers. And of course you can go you know, you can look at English stocks and you you can at least get monthly and annual returns

all the way back to the at seventeenth century. So one of the things you you've written, which I find quite intriguing, is that most returns are determined by the asset allocation of the portfolio rather than the assets selection. Explain that, well, there are risky assets and there are risky riskless assets, you know, Tobin separation theorem. Uh. And that's that's how I view portfolios. Uh. Is You've got the stuff that helps you sleep at night, and you

want to keep that as safe as possible. Things with a government guarantee. Uh. That's you know, that's next month's grocery money. Uh. And then there's the stuff which you're really not going to be touching or shouldn't be touching for decades, and that's the risky stuff. Uh. And that's really all there is to it. And I think that I think it is a bit of a mistake, not a serious mistake, but a bit of a mistake to mix the two. So junk bonds, for example, corporate bonds

in general, I think are our mistake. Anything where you're reaching for yield is not optimal. That's correct. Yeah, Yeah, Duration I'm sort of neutral about. You can make the case, as you well know, that duration is certainly a risk, particularly in an inflationary environment, but when the excrement really hits the ventilating system, duration is generally a good thing. Let's talk a little bit about physicians and why they're such terrible investors. My instinct is to say it's ego

and an excess of misplaced confidence. I think you're gonna say something else, what why are doctors such bad investors? Well, you've you've hit two of the high points. But the major reason I think is that they don't take investing seriously. A physician, and I think most physicians who are properly trained will not treat so much as a cold without a detailed review of the peer reviewed literature, discussing things with their their colleagues, uh, and you know, a thorough

review of the database that's available to them. On the other hand, physicians, when they approach investing will do it by you know, reading the Wall Street Journal or USA Today or Kiplinger's Uh. And the way I explain that to them is you know, when you have to treat someone with a serious disease, you don't get your information from psychology today or USA today. You go and you look at the most authoritative sources. Investing is exactly the

same sort of subject. It's a serious endeavor. And just like in order to do medicine, you have to start with the basics anatomy, physiology, pathology, pharmacology. Uh so too when you approach investing, you should exert a similar amount of effort. You should learn about the theory of investing. You should learn about the history of finance and of investing. You should learn about its psychology. And lastly, you have to learn about the business aspects of investing the people

who are selling you the products. That sounds a lot like the four pillars of investing. Those are the four broad categories theory, history, psychology, and actual business. The brand envelope is in the mail, so let's talk a little

bit about that. How did you come to the conclusion that those four um broad subject areas are what underlies each investors or should underlie each investor's theory, the four pillars that support their portfolio well by observing the mistakes that people make, and I found that people made four basic mistakes. Number one is they didn't understand market theory, financial theory. They didn't understand that there's a correlation between risk and return. It's the almost like the law of

gravity in investing. And they didn't understand the theory of diversification. UH. And they didn't understand basic portfolio theory how you mix assets. Secondly, they didn't understand the history UH. And that came whom uh during the tech bubble of the late nineteen nineties, when people had absolutely no idea that they were living through something that had happened many times before. Uh. There was a script to the movie, and if you read

the script, you knew how the movie ended. UH. And of course of the people who invested in the nineties did not know how that particular movie movie ended. There's a psychological aspect of investing which you've alluded to. People become overconfident, and it's not just that they're overconfident about their ability to invest, but they're also overconfident about their

ability to bear risk. They throw, if they're smart, they throw something into a spreadsheet, they throw a simulation, and there was spreadsheet and they say, ah, here, I've lost thirty or forty percent of my money but only lasted for a brief period of time. I can ride that through, UM, but there's a big difference between doing that in real

time and doing that in a spreadsheet. And way I like to describe that is it's kind of like the difference between crossing an airplane and a flight simulator and doing it for real. Uh. Your your your your pucker factor as pilots like to call it, uh changes and then finally, UH, what you also uh find is that physicians and a lot of people really don't understand the conflicts of interest that are inherent in the business. Which is a very polite way of saying that the financial

services industry uh maybe the country's largest repository of criminal activity. Well, let's hold aside the actual criminal activity and look at what's legally extracted in terms of fees. There was a big debate about the fiduciary rule UM, coming from the last administration to this one that people who were in the business of managing other people's money argues, the camp that I'm in should behave like doctors and lawyers and account is where the client's best interest has to come first.

But a lot of Wall Street thinks that that is problematic. It will impact fees at will impack services. What's your view on the fiduciary rule. Oh, I think it's a superb idea, and I think it's only a start. I think the odds that you know, we're going to see that in this administration, whether it lasts another two or six two or six years, is about the same as you and my starting at shortstop for the Yankees. I

got a good glove. Okay, well, good, I'm I'm, I'm I'm you know, I'm short and I can't jump the rotator cuff. I won't be able to anyone who's fast will beat the throw to first. But other than that, but but there's there's certain things that should just flat out be, you know, felonies. It should be a felony to place, for example, an insurance product within a retirement account. Okay, so wait, you don't think putting an expensive tax defer annuity in a four oh three B or otherwise tax

DEFEROD account is problematic? You you have an issue with that, I'm afraid, I'm afraid I do. Uh And you know, and I think there's certain products that should just flat out the be outlawed. I think that, you know, uh, double and triple and inverse H E T F s are basically a mathematically certain way in the long term of losing money. UH. And the rationales that are given further use are that while they're useful for short term timing,

well you shouldn't be doing that either, you know. I mean that's you know, short term timing of the market is is one of those activities that's up there with with high risk sex and UH and skydiving and visiting a saudy consular. UH. If you're if you're an American journalist, is exactly yes, you know it's funny. Um, I we'll

we'll move this to the back of the segment. But I was doing research on four oh three B for a column I was writing for Bloomberg, and I discover ward, this is your point is so well taken about history impacting how you think about things. As it turns out, the four H three B the retirement plan for teachers for state workers, for anybody who works for a charity

or nonprofit. It predates four O one case by decades and was passed by Congress to sort of apparently a number of charities were doing these all insurance based products for their employees. They were inexpensive, they were tax deferred. There was no other alternative, and Congress wanted to extend that to everybody, including people who worked in various churches.

And that's sort of the history of four H three B. And once the rules were changed and you you had this tax deferral built in and there was no longer need for an insurance product, the momentum in the infrastructure around that didn't go away. And that's part of the reason we see four three bees jam fold of overpriced, inappropriate tax deferd annuities that are better off you know, nowhere, but certainly not in a a tax deferred um nonprofit

retirement account. It's quite fascinating. I thought I would I would mention that. I just thought it was really interesting. All right back to where we were. Um, So, have your thoughts and ideas changed about asset allocation over time or was the original research compelling? And you've you've stayed with where you began a good couple of decades ago. I haven't changed my my point of view very very much.

I mean, one of the sort of sardonic things I like to say about finance and how it's different from other serious fields of endeavor, is it, if you want to be a good doctor, you've got to internalize thousands of uh medical articles uh and pieces of research. The same thing with you know law and and all the

case law you you have to know. But I'm pretty sure that that any competent practitioner could put up a list of two dozen peer reviewed articles that if you knew them, uh you and you had fully internalized them, uh, you would know pretty much all that you have to know at a practical level. So that's another way of saying, there's not much new that comes out uh every year. Uh.

That's that's worth that's worthwhile. I mean, just the past several months, there was an article published by the Abu Dhabi Investment Authority on shared delution and long term equity returns. Very important article because it showed that in the long term, it's delution of shares or its opposite net buy backs that determine returns and so you can explain, for example, the really just awful returns of Chinese stocks. This is a market with with with a lot of economic growth

and back of it. But the returns have been about the worst of of any large national market be cause of the delution. On the other hand, when you look at the winners over the past hundred years, you know, countries like the US, Sweden, Canada, the UK, Australia, South Africa, those have been the countries that have deluded their share pools the least. Quite fascinating. So let's talk a little bit about the efficient Frontier Advisors LLC, where you manage assets.

What motivated you to shift from being a doctor to an asset manager. Well, when you publish finance books and you find yourself, you know, quoted in national media, people start asking you to manage money. It's it's that simple. Uh. And so at a certain point you just can't say

no anymore. Pretty much, Yeah, pretty much. And some people do say now, but I I didn't, And I was fortunate enough to be in contact with someone who already had an advisory service h up and running, a woman by the name of Susan Sharon, and uh we got together on the internet. Uh, and we've been in business for the past twenty one years. Wow, that's quite interesting. So you describe this as a boutique investment advisory UM intentionally designed for a limited number of clients. What what's

the thinking there? Well, the thinking is that both of us have already had careers, uh, and we're at an age when we don't want to do anything. Uh that isn't fun. Uh. And it's not fun managing money for people who don't know anything about finance. So we restrict our practice to people who have a solid basis of knowledge of financial theory and of financial history. Uh. But I have to I have to interrupt you there. So it's more than just hey, you need a twenty million

dollar minimum. It's you have to understand what we're talking about and be familiar with this so you get what we're doing with your capital. Is Is that what approaches? Well? Sure, because you know, come two thousand and eight, two thousand and nine, we don't feel like being woken up at three am eight Right. So just in the broadest terms, what sort of services are you providing for this client base? It's it's investment management only, just pure What about financial

planning and taxes and state planning and all that fun stuff? Yeah? Are our clients basically get that separately? I mean of course, you know when you talk about the cumulation uh, and life cycle planning, of course we're we're part of that because that's part of the investment process. But no estate planning and insurance recommendations. We make very little of those. We leave that to other people. And you do not accept new clients. You're not out on a promotional tour

to drum up business. No new clients for for efficient fronteer advisors. When did you stop accepting clients? And and why? Four years ago? Uh? And you know, I like to joke back then that we were both pushing seventy with a short stick. Uh. And that stick is now is now well broken. Uh. And so it's it's it's we really don't feel like taking on new clients at our age. That's number one. And number two, it's not fair to

be taking on a new client. Uh, you know when you're when you're both getting the maximum social security benefit. You've written about the role of investment advisors and why they should be fiduciaries. What do you think is the appropriate way they should be compensated? This is like a really big debate these days. Yeah, it really, it really depends upon the level of expertise of the client. Uh. You know, there are some people who are absolutely uh

fine with, for example, an hourly phase basis. But those kinds of people have to be comfortable making their own transactions, right. Uh. Once you know you're in the model where you're the one who is making the transactions, you've got discretion. I don't think that model works anymore. I could be wrong, but I just don't think. I just don't think that it does. Um. And you know there's the new fee

model that Jason's Wide wrote about recently. Yeah, just just last week, a subscription of a subscription model, which I think, I don't know. It sounds to me like a hybrid of of the two. So it depends on how much hand holding you've got. But it gets to a more basic problem in our in our society, which is that we live in a world where you're expected to do your own retirement, uh saving and planning and investing in.

The analogy that I use is it's kind of like a stuff on the airplane to go to Chicago, and you go, you turn right off the jetway to go to your seat, and and the flight attendant says, oh no, no, no, no, you're turning left, you're flying the airplane. Uh, and everyone's become do it yourself? Is not because they want to, but it's been mandated. Yeah, and it's a I think it's a colossally stupid system. So what's a better system.

How should we actually have retirement saving and planning set up? Oh? I think that there are several systems that that that work well, and I'm certainly not an expert on them. But the Dutch in the Canadian systems are well funded at the national level. Is that funded by individuals or by taxpayers or are they the one and the same

people basically by individuals. The Australian system as well, and of course the Australian system, you you have mandated savings rates you know that are now going to be well north of ten percent. So, in other words, when when FICA and everything else comes out of my payroll, ten percent gets pulled out and saved for retirement, regardless of my desires one way or another, right, exactly, a mandatory, a mandatory system. And of course you know that will

that will make a lot of libertarians happy. But but then again, it's not fair for someone who doesn't save anything and then expects the state to take care of them at age sixty eight old ninety right, exactly exactly, so that that's really quite quite a true Again, So you're right, the wealthy are different than you and I. They have more ways of having their wealth stripped away

from them. Explain, well, Uh, you know, when you become wealthy in our society, it becomes quickly externally apparent, uh, if you so choose to flaunt it in that way. I think the new generation is less uh, less likely to wear flashy watches and drive expensive cars. Yeah, but you know, at the end of the day, human beings are the are the apes who seek status for sure, and and it's it's and the good evolutionary reasons having

to do why why people do that? And so when you become wealthy, you're basically painting a great big bull's eye on your chest, uh for the bad actors in the business. And the more wealthy you display, uh, the more likely you know you are to get hit by one of these people. Quite interesting, your historical non fiction works are very very different in tone and content than the investing in financial books. They appear to be deeply deeply researched. Every page is a dance in many ways.

They they remind me of your namesake, Peter Bernstein, whose similar books. UM. Every page is just filled with so much information. What made you decide to start writing like this, like you are a full time author. Well, uh, when you start writing about finance, you realize that the history is so very important. We got into that in one of the last uh segments. UH. You know, as Santiana famously said, if you don't know your history, you're doomed

to repeat it. Nowhere is that more true than in finance. And I discovered that I enjoyed writing writing history. In fact, it was the part of the books that I wrote that I decided that I liked the most. And so after I had written uh two books of finance, The intelligenaceid Allocator and The Four Pillars of Investing, I approached my um uh then publisher McGraw hill, and I said, I would like to write a book about the growth

inflection that occurred during the early nineteenth century. Before you know, about eighteen twenty or so, economic growth UH in most nations was very close to zero. And then in the leading edge nations, the England, the United States, and most of Western Europe growth rose to about two percent per year, which, uh, you know, compounded over the centuries, has produced the enormous

improvement in standard of living that we have. And I wanted to know why eighteen twenty, because you know, the Industrial Revolution had had started almost a century before that. There was something else that was happening, and I wanted to write about that. So that was Birth of Plenty, which was modestly successful, and it also became a calling card as well. For that that got the attention of of other publishers, and then that led to explain that

exchange correct. Yes, and Peter Bernstein gets into that story because a couple of years after I had written Birth of Plenty, I get this phone call from an acquisitions editor at grow Atlantic by the unlikely name of Brando's sky Horse. Uh. And that's a phone. That's a message you'll take, Yeah, put him through. Yeah. And so he he said, you know, we we want you to write a book about the history of world trade. And I said three things. Number one, I don't know anything about it.

Number two, I'm not interested in it. And number three, you've got the wrong Bernstein. And and there was this sort of pregnant pause at the end of the line, and he said, well, we actually did have lunch with him last week and we offered him the book, and he said he was busy, he was busy writing his history of the Erie Canal. But Peter said, there's this other Bernstein and that's that's how I got to write the book. That's very funny, this other Bernstein that that

really is hilarious. So this obviously how a whole lot of work and research that went into it. What's the process, like, how long did it take to research this? How long did it take to write it? A book like this takes about four years to write. Yeah, And and the process is, uh, you start by doing, uh, just a truckload of reading. Uh. You know when you when you write a book like this, you're probably reading about somewhere

around fifty thousand pages of material. And the analogy I like to use is it's kind of like you've got a puzzle, this enormous jigsaw puzzle to put together, and you're given ten thousand pieces, but you can only pick a thousand pieces to make the picture with. Uh. So it's a difficult process and it's it's a skill set. I guess that not everyone has, but it's something you know, is one of these things I discovered I actually knew how to do, and it's an enormously enjoyable process I've

I've you know, this particular book was quite successful. The book that I wrote after that was an absolute flop, uh on the media. It was on the media, was on the history of communications, technology and media. But the point was is that I had just as much fun writing both, and I feel just as good as I about about about both. Is if you don't enjoy the process,

you should not be writing, to say the least. So when you say you read fifty thousand pages quick back the envelope, that's a hundred books at five pages each or something like that. Yeah, of course you're not reading a hundred books. What you're doing is you're climbing the bibilio graphic tree. And you might read a few of

those books all the way through. But what in fact, what you're really doing is you're reading lots of books sections just maybe a couple of pages or even a paragraph or two from each source, and then you're branching

out into the bibliographic tree, into the reference sources. And it's this tree that goes out several branches, and you the nice thing about it is, you know when you're done when you keep coming back to the same sources over and over again, when you reach that point that you're being referenced back to the same the same academic articles, the same text, the same secondary sources. Uh, you know

that you're done. Let me throw a few questions that you from the book The World's greatest human cataclysm, the plague the Black Death was the direct result of long

established trading patterns. Explain that, Well, it's a it's a fascinating thing that epidemiologists like to talk about, which is that when you at least his medical historians like to talk about, which is that when you look at the world around the year one thousand, you you had these pools of people, these civilizations, uh and tribal societies that never communicated with each other, didn't didn't talk, didn't deal with each other, didn't even know that they existed, and

so they each developed their own gene pools that people outside that pool were totally uh vulnerable too. And so there is this organism called your ne epestis the plague Bacillus, which existed in h ground roads uh or fleas on lease. Yeah. Fleas, yeah, fleas on fleas on roads. And the the the animal that you know back in that part of the world was an animal called the tarabagin uh. And the rat was did they didn't they did this. Fleas didn't learn

to to to jump onto the rats until much later. Uh. And and this you know, was was present in East Asia, Northeast Asia uh and probably in the Indian subcontinent as as well. And then during the twelfth and thirteenth century uh. You get a period of time called the PAXs Mongolica, when the Mongol tribes conquered territory all the way into eastern Europe and in the other cons yes, and and so they opened up trade land trade routes uh. And of course the fleas hopped a ride on the camels uh.

And they got to a place called Kafa uh in in in Asia Minor or actually in what's now the Ukraine. Uh. And and there's this terrible siege of Cafe where the Mongols are are besieging Cafe and they throw over the catapult over the city walls, these corpses uh biological office exactly.

And that that infects the Genoese traders who then UH basically carried the disease first into I believe the port of Messina in thirteen forty six, and then within three years a quarter to a third of the population of Europe was dead the damage and the rest of the world, which much was much worse. Probably it killed as much as people in the main ports of Egypt as well

as in China. And a lot of this has to do with the fact that there is no indoor plumbing, there is no system of sanitation, and that filth and other things are are continue to be spread. Or is that a different rent uh? That wasn't. That wasn't the mechanism of of the plague. It was more of an air air air airborne UH disease. People would develop a cough and transmit UH disease disease that way, and it

was just very very rapidly, very rapidly spreading. Now, the thing that's really interesting is that we worry about international air travel and how rapidly diseases spread, but we've not seen anything nearly as deadly as the plague, or for that matter, the the the influenza outbreak that occurred after nineteen eighteen. And the reason is the danger is not mixing. It's not mixing, that's the danger. So in other words, we now have a broader gene pool around the world,

and we're more capable of finding off. There are less new things that are specifically capable of doing damage, for a to a different gene sub subgroup. Is that right? Yeah, I think we're in a much safer world than we were. Uh uh you know, say, you know, say seven or eight centuries ago. Um. And and we've also gotten to be you know, public health authorities have gotten to be

really good uh at at disease prevention as well. We tend to think of stock and bond markets as a relatively recent historical phenomena, but you right, there have been credit markets since human civilization first took root in the Fertile Crescent, in other words, thousands of years ago. Is that right? Well? Sure, And and there's actually a trace of interest rates that goes back at least four thousand

years and perhaps as much as five thousand years. Uh. You know, if you're a farmer, uh, a sedentary farmer in the in Babylonia or Samaria, Uh, you need credit. You need to borrow money. For farm implements and to build a house, but most importantly to buy seed corn. Uh. And of course you're not borrowing money, you're not even borrowing silver. What you're doing is you're borrowing uh seed corn from your your neighbor. And that seed corn has

a cost of capital. So typically in in in in very primitive agrarian societies, it's probably around a percent per year. So in other words, I bought borrow one bushel of of corn or wheat seeds, and in exchange I returned to is that is that about right? That's right? Or one calf uh? And then a year later, at calving time, you've got to return to calves. Quite quite interesting. UM's capital and that's considered capital exact in those days. So

now that's going backwards, let me go forwards. One of the things you wrote was trade almost always benefits the nation that engages in it, but only when averaged over the entire national economy. That will always be a minority hurt by evolving trade patterns, and they always call for protection. Sounds very similar to what's going on currently with this administration and its battle with China and others over trade practices.

One of the things that is most satisfying about writing nonfiction is to come up with historical examples of modern phenomena. There are three and four hundred years old and even thousands of years old, And there's this wonderful UH story of these riots that swept London UH in around the year Sevre, having to do with the textile trade UH, where weavers stoned UH and attacked parliament, the East India Company offices as well as the UH the home of

the Governor of the East India. It was basically the Seattle riots, UH, you know, three hundred, three hundred years ago, and the reasons for it were exactly the same. There were people who were out of work. So you know, clearly we're much better off now because of of trade UH you know and cut off trade, increased tariffs. And you're gonna find yourself, you know, in the situation of the the Iowa soybean farmer who's going to lose his

farm very shortly because of the Trump UH tariffs. Are you going to find yourself as a consumer paying three and four times for your shirts and your electronics what you're used to, Or of automobile manufacturers whose costs have gone up because of metals UH tariffs. So clearly trade benefits and entire the entire nation. And you saw that in reverse during the nineteen thirties, UH, with the trade wars that followed the Holly Smoot UH tariff. But they're

always losers. Okay, there are textile workers who've lost their jobs. There are auto workers and steel workers who have lost their jobs. UH. And you have to, you know, the key to a successful global economy and a national economy is simply to have a system that compensates the losers. UH. And to think that, you know, you can cut off trade and not compensate the losers, which is what this administration wants to do, I think is the height of folly.

So so, when you say compensate the losers, traditionally that has been some sort of job retraining or new education. How else can we compensate people whose industries no longer exists. If you're a coal miner or if you're a furniture manufacturer in the US, these jobs are going away. What should we be doing as a nation for the losers on that end? Really, the better way to say it is the people who are on the losing ends of

of these international trade deals. Well, those are the first two things that you need to do, but you need a broader social welfare network. You you know, if you lose your job, you shouldn't lose your health insurance. Uh. For the only nation in the world that does that exactly. Uh, you know, we should increase do things that increase social mobility. The United States, in fact, has the lowest social mobility

of any developed nation. If you are born into the bottom quintile UH of of income, the odds of getting into the top quintile of income are only six percent in the United States. It should be a perfectly egalitarian system. Uh. In most developed countries it's about thirteen percent. Now when

you look inside the United States, it's very interesting. Uh. What you discover is that in Silicon Valley, for example, if you're born into the bottom quintile, the bottom five, you have a European chance of getting to the top quintile about thirteen or fourteen percent. But if you're born into the bottom quintile in Alabama, you've got a three percent chance. What does that tell you? It tells you that people in Alabama are not investing enough in their

young people. And so that's probably the primary thing we should be doing at bases. We should be investing far more money in education. I find it remarkable that the people who rail against the public school system and the money that we so supposedly wasted that system, will happily spend three and four times that amount every year on their to send their kids to private school. Quite quite interesting. You discuss how economic ability has has is so low

in the US. It wasn't always the case. Wasn't there much greater economic mobility previously, especially the post War War two era. Well, just to give you one small, very anecdotal, very small example, my medical school tuition was fifty dollars a year. I came out of medical school with almost zero debt. Good luck doing that today, right, it's two hundred thousand a year. If it's anything, it's it's quite

quite insane. Um. Let's talk a little bit about Masters of the word, how media shaped history from alphabet to the internet. So there are a lot of really interesting bullet points in this book. You make the case that Guttenberg did not change the world with the printing press, but in a slightly different way explain it's a fascinating bit of of technology. Which is that, of course, he didn't invent the printing press that the Chinese and the Koreans had it. They even had, the Koreans even had

moving alf, even had movable alphabetic type. What Gutenberg did was to make the production of that type much more efficient. If you think about running a printing press or printing a book, you're talking about literally owning hundreds of thousands of pieces of type. Uh. And if you're casting that individually via the pre existing processes, that was something that was open only to two governments. That the Chinese government

was able to do it. Uh. Back then there were some Korean printers who could do it, and that was about it. Um Guttenberg invented a metal alloy process of casting that enabled a skill type caster, my favorite word, a type caster who who could produce about three pieces per minute of alphabetic type and basically bring it down to the artisan level. So what Guttenberg did was in

invent the printing press. What he did was invent efficient the efficient production of movable alphabetic type, which was a far more subtle invention. So here's another bullet point from from Masters of the Word. You write the Fall of the Soviet Union resulted from a colossal error in radio production. Explain that, well, the Russians UH produced, mass produced their radios uh and in a couple of factories. It was very centrally driven, and they made a mistake that the

Nazis didn't make. The Nazis were smart enough when they made their radios uh and the Nazi regime basically came into being pretty much at the dawn of popular radio in Germany, and they made sure that the radios were not tuned well enough to produce foreign broadcasts uh and the Soviets didn't do that. The Soviets built radios that allowed tens of millions of the citizens to get the BBC and Voice of America and deutschewella, uh, it was,

it was. It was just a colossally the sort of colossally stupid thing you would only see an essentially planned economy. That's hilarious. So so now, one of the things you write about this in the sort of pre social media days was that as more people get access to means of communication, the result tends to be more democracy. Do you still hold those views in the face of how much fake news quote unquote um and and the way

Facebook has been weaponized to influence elections. You do you still hold those views or what are your thoughts about that change in in social media. I still believe the basic precept and the the the analogy that I like to use is that in the era of radio and television, it was so centrally controlled that getting into a fight with the national powers that be, whether it was the media or the government or the government controlled media, was like bringing a knife to a gunfight. Uh. Now both

sides have guns. What I really didn't anticipate, and I don't think anybody anticipated even five or six years ago, is that you've you've enabled the worst players in our society. Uh. And and that's the you know, this industrial grade Uh that that that's your phrase, By the way, it does feels, but it's true. It's not just running the mill BS.

It's manufactured at a very high level. Yeah. And and and of course there's there's this famous moral philosopher, uh named Harry Frankfurt who will be known forever after for a little sixty eight page essay B S Yes. And what is BS BS is is not just things that are necessarily false. Sometimes BS can actually be true. But it's just words that are spoken that have no reference and no intentional reference to the fact the facts, And of course you know we've we've now enshrined that. In

our Commander in Chief. The description I like best is we we live now in a post fact era, which kind of cracks me up because I don't believe it's such a thing as the post fact era. Um, but here we are, and uh, can you stick around a bit. I have a ton more questions for you. We have been speaking with William Bernstein, author of such books as a Splendid Exchange and The Four Pillars of Investing. If you enjoy this conversation, well come back and check out

the podcast extras. Will we keep the tape rolling and continue discussing all things finance. You can find that at iTunes, Overcast, SoundCloud, Stitcher, wherever finer podcasts are sold. We love your comments, feedback and suggestions right to us at m IB podcast at Bloomberg dot Net. Check out my daily column at Bloomberg dot calm slash Opinion. Follow me on Twitter at Rid Halts. I'm Barry Ri Halts. You're listening to Master's in Business

on Bloomberg Radio. Welcome to the podcast. Bill, thank you so much for doing this. I um, I've been looking forward to having this conversation. You and I have swapped emails over the years, and you've had some lovely things to say about this format. So I'm thrilled to finally get you in here in the booth and have this conversation. Can I Can I say a lovely thing or two about your format if if you feel inclined? Yeah, I do. Uh. You know, there aren't very many people in this world

that I actually envy, but you're one of them. There there are. There are a few things that I enjoy more than talking to people have who have interesting things to say, and that seems to me to be all that you. You do. Whoever you feel like talking to you can get on this program. Don't let anyone else know. That's secret. Yeah, and I and I and I envy the heck out of out of the platform that that you have and how you enjoy yourself. I'm gonna let

you in a little secret. My writing is for no audience of one, and this show effectively is for an audience of one. I've managed to con everybody into thinking that this is supposed to be a broadcast. But essentially it's me having a conversation that I want to have. Yeah, you get people to answer your emails who never answer my emails, and I am green with envy. Well, if I can help make an introduction, I would be happy to do that. You're not, by the way, You're not

the only person who said that to me. Some other people who I won't say on air, but i'll tell you privately, have said that to me. And it's really oh really, So people have figured out that this is a giant self indulgence and they wish they could do See if you are in an Oregon, if you were in New York, you can wing something like this together. Um.

Other people have done this in a way. Mark Maron started in his garage and Los Angeles, and since he was a stand up comedian for forever, he would con his comedian friends to come in and that's blown up into this giant thing. So there's something to just engaging in a little bit of self indulgence and speaking to people you want to speak to. Yeah, one one thing, Barry, it's Oregon. You say Oregon to Oregon. You say Oregon too many times. That's a band. Actually, there was a

band called Oregon and I that's where that comes from. Yeah, but you do it too many times. We take away your visa to come to uh, what's going on in Portland, Oregon. It's that that is a city that is now both booming and kind of completely out of control, isn't it? Yeah, it is. It's It's what happens to any city where when it becomes too popular, uh, and the cost of of residents, the cost of real estate goes up. Uh

as you get out of whack. Of course, you know, we have you know, the the ultimate example of that is San Francisco, which has gotten to be this ludicrously bifurcated place that is populated but with this you know, bimodally on on. You know, there's this one peak of people to the to the right of the curve, who who have you know, matth s a t s of seven fifty and can talk in differential equations and in finance, and who are very well dressed and are spending you know,

nine dollars on avocado toast for for breakfast. And then you've got the other people who are on the cusp of homelessness or are homeless speaking of which the West Coast has far more homelessness than every time I'm out there then I previously remember, and the last time I was in Portland, I was shocked at the number of

people living on the streets. It's quite amazing. Yeah, serious, serious problem is one factoid that I've seen repeated, I've not verified it, which is that if you take Los Angeles out of the analysis, the homeless rate in the United States is actually falling. Oh really, so so why Los Angeles other than the um weather allows you to live out their year rounds? Uh? Probably probably just you know, it's like any other complex social phenomena, it's a list

of factors whether uh, and the very high cost of housing. Uh, it's it's geographically dispersed, so it can accommodate a lot more homeless people without making people too upset. Just the whole whole range and things. Yeah. And the stat I saw that so disturbing is north of fifty of homeless people are suffering from some mental or emotional disability, and because they're homeless, they don't have access to medical care

or regular prescriptions. Yeah. If you you know, if you if you dole out food in a in a homeless shelter, which you very quickly find out is there's three populations of people. One are substance abusers to our schizophrenics, uh, and three and equally large people. A group of people are people just like you and me who are working

their rear ends off h and are extremely conscientious. But they got a bad draw, they lost their job, they lost their health insurance, they became ill, uh, they went bankrupt, and they wound up living in their car. That's quite horrifying. And when we talk about lack of a social net, that's the group that seems to fall through the cracks. Although there are that many schizophrenics who are untreated and

they all eventually become homeless. Is that is that the implication there that's a really good question is is to what percentage of of of of schizophrenics become homeless. It's a very high percentage of them, really Yeah. I mean they're the ones who are most visible, because those are the ones who were shouting at the top of their lungs as you you know, walk by them on the street. So so there's a bunch of questions we did not

get to during the broadcast portion. And I wanna run these by you before we get to our favorite question, Shians. Some of these are really quite quite intriguing. Um, let's let's start with finance and then work our way through some variations. When a quote, I'm going to give you a quote of yours. When a famous investor starts publishing a newsletter, it's a sure tip off his investing techniques

have stopped working. Discuss well, that's an elite, but a goodie. Uh. You know, if if you or I actually know how to reliably beat the market, you're not going to tell anybody about it. You're not even gonna tell your own mother about it. You are going to leverage yourself to the hilt. You're not going to take anybody else's money. Uh, that's not that's not you. That you haven't borrowed yourself. And then when you're done, you'll go to the beach. Uh.

You're you're you're you're sure as not. You're sure as heck not going to publish a newsletter and sell it for two a year. My my favorite part of the Jim Simon's Renaissance Technology Lure is after few years of the medallion UM their their flagship fun throw off. Annually they basically said to investors, listen, there's a finite amount of alpha here and there ain't enough for you and me,

so you gotta go. And they returned all of the outside money, and now the medallion fund has been Renaissance Technology employees and Jim Simmons. That's basically at a year for forty years something like that. It's a it's a crazy, crazy number. Um speaking of crazy numbers, I don't remember which book this is from, but this really um blew my mind. An old Master painting bought from the artist for a hundred dollars and sold three hundred and fifty

years later for tens of millions of dollars. Returns but three point three percent annually. Explain that, Well, it's it's it's you know, it's called the magic of compounding. Uh. You know, if you if you save and you have a decent rate of return, even a modest rate of return over hundreds of years, then you know you'll have a fabulous amount of money. But of course you can't do that because you're gonna want to spend some of the money. Let alone, let it ride for three or

four generations. Now, Ben Franklin did that, Uh, well, Ben Franklin set up an investment portfolio, and I have to admit I'm not aware of details of it, but it was a portfolio that was designed to last some very long period of time and benefit his charitable causes. And it actually did earn a decent rate of return over a period of more than the century and wound up

being worth a lot of of money. But what you know, what I like to say about that is that yes, if you, if you, if you put you know, a hundred dollars into stocks and then save it for for for seventy years and invested for seventy years, you're gonna have a fabulous amount of money. But myself, I'd rather be twenty years old with a few with a few euros in my pocket on the boulevards of Paris, uh than be ninety years old with with millions of dollars.

Thank you so much for saying that. I get the fire group of of people who think you should live like a pauper, pour every penny you have into the stock market for ten or fifteen years and then retired at age forty, and it just seems so wrong to me to to not enjoy life in your twenties and thirties. Who wants to live like that if you can avoid it. I tend to be you know, I tend to be fairly sympathetic to the fired group. But it's it's a

suspicious Uh, it's a suspicious group of people. A lot of these people were people who were making six figure incomes in the industry and then got to retire at age thirty three or thirty five with a giant pile of stock options to right, exactly, and and if that works really well as long as you don't have children

or get sick, right, that's right. But there is some thing to be said for being able to enjoy and appreciate the work you do and have finding some some meaning and some value in your hourly labors and not just split wood and round up in water the horses and live the life of a hermit or or so it seems moderation in all things. That makes that makes perfect sense. Um, So there's two others that were that

really stood out. UM. I have a pet thesis I'll share with you in a moment, But you wrote, at a very early stage in history, we are encountering survivorship bias. The fact that only the best results tend to show up in history books. Explain, well, there's a classic example of that from World War Two uh Ari Woldman and

the planes coming Back. Yeah. Yeah, So it's you know, just for the readers who listeners who haven't heard us when you when they when they analyzed the bombers that came back from World War Two and they looked at the patterns of of the of the Shropnell uh bullets. Yeah, they found that there was there were areas that that didn't ever seem to get hit. And of course the reason why they never get his when he got hit in the fuel tank, you didn't come back, or the engine.

If it hit the engine, you're not going to make the flight back. It's the same thing in in finance. Uh. You know, you you see the people who did well. You the thing that sticks in your mind is the guy who bought Amazon or Microsoft on the I p O. But what you don't see are the other of IPO investors who who did uh? Who? Who who had their heads hand into them? So there was um I call this the the loss and found stock certificate. There was

a story in the papers. Uh, it's got to be a decade ago, Uncle Fred buys some E M C and he gets the certificates, and it goes into a firebox and it gets stuck somewhere in the attic, and nobody looks at it for twenty five years, and then they find the stock certificates and wow, it's worth six million dollars and it makes the paper and it's fascinating.

But the reason that's so misleading is if you would have bought GM, and and then GM subsequently declares bankruptcy or fill in the blank, Lehman Brothers or pets dot Com or whatever when he finds those stock certificates, Nobody tells the newspaper. Nobody writes the story. You don't hear about it. You only hear about the odd ones that, wow,

a fortune was created. And that's pure survivorship bias. Yeah, and it's the same thing, you know, to a to a more subtle degree, but but a more important degree. Probably with with mutual funds. Uh. You know, there are there are There are mutual funds that have done very well, uh and have good long term records, have beaten the market.

But you know, for every one of them, there are probably twenty or thirty that got euthanized by the fun family because so poorly, and you don't even see those in the record unless you have the right the right database, So that gets pulled out of the data, and it makes the surviving fund average look much better than it should be. Yeah, and and it's a it's a much

even bigger problem with hedge funds and private equity. About of hedge funds disappear each year because of that high water mark, right it's two and twenty being the net gains above a previous high. So if you suffer a draw down, you're not gonna get that big fat so you're up and over. So they dissolve and start over, and it makes the numbers look much better than we should be. So my my pet thesis on survivorship bias is that everybody's conception of the world is completely wrong.

Everything we see is survivorship bias. When you look at a pen, or when you go to a restaurant you like, which perhaps is the best example. How hard can running a restaurant being You get a good chef, you get a friendly hostess, uh, you get a little media buzz. You don't see the other For each successful restaurant. You're not seeing the other hundred that have come and gone after six months at great expense and anguish. And there's a reason it's a terrible investment. There's a reason films

and plays are a terrible investment. Most plays are in Hamilton's. So everything is survivorship bias. And you know you're talking about how doctors are such awful investors. I mean doctors are certainly not the only occupational category that's that's susceptible to that. I mean, entertainers and sports figures in particular, uh, regularly lose their their shirts on restaurants. When you look at the bankruptcy statistics for specially NFL and NBA players,

very very high, it's it's a shocking, shocking number. Um. And then you know, the one other book we didn't talk about, um, was the E book, the Deep Risk Book. Was that an e book or a print book? Well, I've produced four e books, actually five e books. One of them I giveaway for free, That's If you Can, And it's actually probably the most widely distributed of my IF which is a book for millennials. UH, And it's been hundreds of thousands of downloads because it's free. Uh

it was, you know it was. It was an elamassinary project named millennials who didn't have assets. And then I have three short booklets, uh Deep Risk in the Ages of the Investor, in Skating where the puck Was, and I sort of combined that and a bunch of other things into a newer version of intelligenaceid Allocator called Rational Expectations Um, which was published four or five years ago. So that's probably a book that's superseded the intelligenaceid Allocator.

It's basically meant for the same uh math geeky kind of audience. And you've called this investing for adults something like that. That's the those five those five series or those five books I sort of fold into what I call my invest Investing for Adults series, which is you know, it's for it's it's for investing adults people who basically understand, uh, market efficiency and who understand the relationship between risk and return and know that there is no returns ferry and

no stock picking ferry and uh no market timing. Sorry, So when you say adults, you are not using that chronologically. You using it in terms of being a sophisticated investor, or at least an informed investor. Yeah, I've I've met fifteen year old investing adults, and I've met seventy five year old investing infants. I swear to God this is true.

I used to get these emails all the time, especially when I was doing a lot of television, and the email went something like this, I just inherited a million dollars. What I'm going to or a substantial sum of money. I'm going to give a hundred thousand dollars to five uh different fund managers and whoever generates the best returns. I'm going to give my real money too. And it's like, why are you incentivizing people to take risks and hope

they get lucky. You're you're not incentivizing anybody to manage your real money appropriately. They don't understand that. It's a it's bad game theory or the other one. I'm looking for double the market performance but with half the risk. I like that one. Also, that's an email used to get all the time. Well, as soon as you find that, let me know, I have a billion dollars for you. But short of that, you're that's that's not really Uh,

that's not really going to happen. Um. Since you're not taking money from people anymore, how does that change how you interact with the public through your site. Is it a different relationship? Do you get sort of crazy emails like that? What? What is? What's what do you see flowing to you from that efficient frontier site? Well, I intentionally make my email address opaque. If it's there, you can hunt it down. You can hunt it down. Uh, And it basically makes you feel bad if you email me.

It's it's one. It's one that's for press only, and that basically scares away of people who want to to run me down. The people who want to run me down and who actually go for that email are people simply who've who have read my books. They don't want information, They just want to thank me. Really, And that's that's yeah, that's the that is. You know, once a week I get an email from someone that says, you know, you saved my life, Thanks so much. That's delightful. Yeah, And

it's it's you know, it's it's it's better than the royalties. Yes, I would certainly say so. Um. Before we get to our favorite questions, I had one last question to ask you, and that's the biggest distraction. What is the biggest distraction investors run into. Oh, well, it's just the entertainment aspect of of investing. It's the it's the c NBC uh

market environment. Uh, the idea that that what's going to you know, where the market's going next year, or what company is producing the best product, or what country has the hottest economy. Uh, it's it's uh what Jane Bryant Quinn called a financial pornographer. So here's the quote of yours relevant to that of what you read about investing in magazines and newspapers, and a hundred percent of what

you can run television is worse than useless. Are you overstanding that or is that pretty much a decent set of figures. Oh? I mean, if you really ask them, I'll tell you what I really think. But yeah, I mean, I mean that's true. The way I like to put it as at CNBC, at Base wants to make you poor and stupid. So that's a different website, the conspiracy to make you poor and stupid. I used to jokingly say, um, you know, you don't walk into a doctor's office and

have General Hospital playing on the television. If you did, you would run screaming from the room. And my pet theory is each of the financial channels reflects their parent company. So Bloomberg is a data services company, Bloomberg Television is all about charts and data and graphics. NBC is an entertainment company, so CNBC becomes all about entertainment. And then Fox Business is is their parent company is Fox News, so it's all about politics and tribalism and partisan warfare.

And each of the financial channels just reflects what the ethos of the parent company is. God, I thought Fox Business was about anchors and short skirts. No, No, that's generally across the whole line is that when you look at some channels more than others, um sex cells, and especially when you're marketing to a primarily male audience. I don't know if it's still a primarily male audience, but that sort of nineties thing, the pre me too era, that doesn't seem to have changed very much in the

past couple of years. It's not not environments. Um the words you don't read anymore is leggy, blonde, anchor people. But pretty much that's mostly what it continues to be. Right, I'm I'm I've read descriptions like that in magazines and it's pretty straightforward. I mean, if I can get all monkey on you. You know, you asked about the return on art, and the reason why the return on artists so low is because it has an entertainment segment part

of the return as well. And this is work that you know, Bill Baumble uh and why you very famously did which a U M. Hell yeah uh, in which he looked, you know, he actually has a return series of of art going back centuries and found that on average it's got a lower return than stocks and bonds because part of its return is is an entertainment return. So if you want entertainment from investing, you are going going to pay for it. You're gonna get a lower

return courtesy of the entertainment. Exactly the investment you want is the one with zero investment excuse me, zero entertainment return, which leaves more room for the investment return. Right. So it's it's I always advise people who can't pull the needle out of their arm, set up a fun account of five, keep it in a different custodian from your real money, and if it works out, great, and if

it doesn't. Thank goodness, it was only five percent, and it's sort of like a little bit of insurance, so people aren't day trading their retirement. But that's basically what happened, the same advice that I give. Really really that's quite that's that's quite interesting. It makes me feel good that that's the that's the right approach. So let's go to our favorite questions. We asked these of all our guests, starting with what was the first car you ever owned?

Your make and model. It was a nineteen seventy two blue eight B baby blue Fiat eight fifty Spider purchased at the factory in Milan for eight hundred eight uh, and it needed to be tuned every three thousand miles. It was both tuned, not oil changed, but full tuned. Yes, every three thousand miles and mixed it again, Tony, Yeah, exactly. And uh. You also have another question about what's one of the one of the biggest mistakes you've made and and when did you learn from them? And it was both.

It was both an enormous joy and you know, ever since then, I've owned Japanese cars. That that makes the pro sense. You know, you talk about art every now and then I'll see a column somewhere about if only you had bought the Ferrari to fifty, it's worth ten million dollars today, initially cost five thousand. Here's the return. It's like, well, what about all the other cars that came out that year that you could have bought and didn't. It's just a pure exercise and survivorship biased. Yeah, and

if you will not you will almost you can. You can't find a Fiat eight fifty Spider now almost for love or money. You can, but they don't cost very much. They're very hard to find because none of them ever lasted that log that's right. So what's the most important thing that people don't know about you? That was? That was a tough one. But what I came up with is that only the people who know me the very

best understand how easily bored I am. I'm the kind of person who likes being on the steep part of the learning curve. So most people, most people in medicine, fine neurology fascinating and I did too for about, you know, ten relatively short years, and then I got bored with it. And it's the same thing with you know, all the other things I've done with my life is you know, I've written a history about world economic growth, I've studied finance,

I've written about world trade. Now I'm writing about human rationality. Uh and and you know, I just enjoy reading new things. For me, what I like, What I like to say is that is that writing is just a way of organizing my reading properly in an interesting manner. And it's a good it's a it's a fun way of staying on that steep part of the learning curve. So it's we always be learning new things. So you you're gonna be writing on human rationality. You obviously use behavioral economics

in a lot of the work you do in finance. Um, and you are a neurologist. There's a subsection of behavioral economics that some people have called neurofinance, where you're really looking at what's going on within the brain within them and the current system. Is that right? You're talking about a lot of the work that gets done with functional imaging technically functional m R. I and I think it's overdone.

It's become way fashionable, you know, as important as the econom and for ski work is, I think it has it's relevance to finance, although it's great, is not as great as as an area that I think is relatively ignored, and that's evolutionary psychology. Uh. We behave in certain very irrational ways, and it's nice to be able to identify the ways in which we're irrational, which is what Condomen

and Versky are justifiably famous for. But if you just read Condomen into Versky, you don't understand what is in back of that behavior. To give you a small example, UM, you know, the fundamental characteristic that we have we've already mentioned is that humans imitator and finance. We say that

humans heard. Why do humans heard? Well, if you think about it, the easiest way to think about that is to think about the history of our species in the Western hemisphere over the past depends upon what archaeological record

you believe. Between fifteen and fifty thousand years uh and over a period of a very few thousands of years, maybe three or five thousand years, humans spread from the high sub Arctic uh in Alaska and the Yukon all the way down to the southern tip of South America, which has a not very dissimilar climate, and on the way they had to learn how to make kayaks. Uh. They had to learn how to make poison darts. Uh. They blowguns, they had to learn how to hunt bison

on the great planes. Uh. And you can't learn how to do any of those things on your own. If each individual person had to learn how to do all of those things on their own, they'd have very quickly become lunch for for a predator. Uh. And so you find the one person who learns how to build the kayak, make the blowgun, hunt bison, and then you imitate what that person does. So we are the species that imitates.

We are the ape who imitates. And once you understand that, uh, a lot of economic activity and particularly behavior and finance becomes a lot more understandable. So am I grossly oversimplifying this because I've looked at the same thing from an evolutionary standpoint, and I he's thought, Hey, primates are a um, They're a herd creature, they're a I don't know what it's called for, monkeys, a a tribe, a troop of monkeys,

or or whoever, of chimps. And that the reason we care about social um status is that we want to be part of the group. If you're not part of the group, you can't survive on your own, and so only those creatures that can herd play well with others that can be part of the group end up being self selected to pass their genes on. If you're a contrarian, if you're an outlier, if you're a chimpanzee that isn't

really going to be core to that social group. You're probably not going to get a mate, You're not going to pass those genes along. Am am I oversimplifying or bastardizing that, or is that just further back in our our conversation. Then, Um, that's three million, not thirty thousand years ago. Yeah, you you well that that's that that goes way back. And as you say, it's it's billions

and millions of years ago. We seek status because it enables us to better, to make babies better, particularly if you're if you're a male, and particularly if you're a male bull you know bull elephant seal for example. But you know human beings have that have have that same basic mechanism operating. That is why we seek status. It's just a way of forwarding our our d n a uh And why use Scott Galloway talks about watches and he goes, everybody has a phone that's far more accurate

than an expensive time piece. But it's a way to signal that I can afford to UM take care of you and your offspring, and therefore these have not yet gone away. It's the it's the broken bag, exactly, and it just shows UM ability to take care of the next generation. Well yeah, yeah, exactly. It shows that it shows that you're able to muster resources. This is signaling a signaling mechanism exactly. So so who are some of your early mentors who affected the way you practice medicine

and then who affected the way you practiced finance. Well, uh, it's really difficult to point out, uh who, you know, It's something at some point I decided I love neurology, uh, And I guess there were some uh junior and chief residents who I glombed onto in my when I was in medical school, and I enjoyed the way they approached patients,

and I enjoyed the the craft of neurology. Uh. You know, and I can think of a couple of names that no one will recognize, but they were basically my Now when you're a medical student, a junior and a senior resident in a subspecially field as a god. Uh. And and and so those are the people you tend to imprint upon. Uh. And then there was you know, several

different you know, several different groups of people. The one person who certainly had mentored to me was my wife, who was an English major, and she knew how to write, and and she taught me how to to to write. Uh. Did she edit your early work? She edits my early work, in my middle work, in my late work. She just I will not send anything to a publisher without having her look at it. Uh. And you know she's she's that good. Uh. And then as far as you know,

finance goes and finance writing. Uh. There was a person I've already spoken about, Frank Armstrong, who encouraged me. Another person with Scott Burns, who was a writer for the Dallas Morning News who was still rites and still also manages money, who told me very forthrightly that I had what it took to be a financial writer, that I was good with numbers, and I could write pleasing prose. And he he said that that I should pursue that.

And then to other people who helped me greatly along the way were John raycenthal Or, whose chief of research at Morning Star, and Jonathan Clements of the Wall Street Journal, who very early on took uh an interest in me. And then there are the people who you know, I had only a very glancing knowledge of or almost no knowledge of it all. But who's writing affective me? And of course that's the holy trinity of of Bogel, uh

and Malkiol Uh and Fama. If we if we're gonna do a mountain rushmore, all three have to go up. And I got to know Jack Bogel a little bit personally, not very well, uh, and then the other two I well, and then and then Gene Fama I do not don't really know at all. And I've become friends too with with John Ray canthall at all. He's enormously helped. It wasn't honest to help to me. I've been trying to get Fama in here for a long time. So if you ever do happen uh the befriend him, send him

my way. He's I've had the other half of that Nobel Prize. I've had children here. But Fama remains elusive and is only rarely glimpsed in the wild. He does not have much of a public uh face. So you mentioned the writers that influenced, influenced you tell us about some of your favorite books, fiction, nonfiction, financial related whatever. Well, fiction wise, I don't read that much fiction. But there are two people who are or popular writing I should

say that I read compulsively. And one of them is gen Lacaray, and the other is Michael Lewis. You know how often nonfiction Michael Lewis is nonfiction. He's nonfiction, of course, and and how often you know both you and I had the experience of reading an article somewhere in New York or Atlantic wherever, and you say, god, this is this is really good. I wonder who wrote this because you didn't really pay attention to who wrote it. And you go back and you slap your forehead, and of

course it was Michael Lewis. So I'm gonna I'm gonna take it a step further. I always know who I'm reading. I I no longer read mastheads. I don't read the New York Times of the Wall Street Journal or The Atlantic or whatever. I read different authors. This is part of my reading evolution. And so I will read everything that Dan Gross or Michael Lewis or Jesse Eisinger or go down the list. Um, so I'd have a tendency to read I And I recall the last time I've

experienced who wrote this. Oh, of course it's I I personally, but I spent a lot of time on the internet, and it's a fire hose. So to make that manageable, I try. There are people who whatever they put out, and certainly Michael Lewis is one of them. Whatever they put out, I just have to read it. Yeah. And then and then there are the three you know, the three great books that I recommend to everybody. Uh. Number

number one is Expert Political Judgment by philth Tetle. Sure. Uh, you know about how what lousy forecasters we are, what mistakes we make, and you know his section on on the on the on the nexus between the media and pundits is required reading, sure for everybody. Uh. There is a book called The Moral Animal by Man Running of Robert Right, which gets to the heart of the origins of religion and morality and of human behavior. It's it's

a book basically about evolutionary psychology. It's like Tetlock. It's a very dense book. And then finally there's a book which is easy, well, it's both easier and more painful to read, which is a book by a British documentarian called Lawrence Re's r e s called al Schwitz a New History, and it is about the camp personnel who worked at al Schwitz and how they did what they did, why they did it, and it basically explains to you

Arrant's uh famous banality of evil. The Germans were not exceptional. They were not an exceptional people. Uh, they were just uh convinced by everybody. The Jews were vermin? What do you do to vermin? Uh? And what I tell everybody that I that I meet uh these days is that

it's a very sure throw from vermin to rapists and murderers. Absolutely, it's it's I think that one of the things that have been revealed by the gas lighting we've seen over the past few years is that it's not hard to fool a huge swath of the population into doing unthinkable things. It's it's shockingly easy. Yeah, any any people, any people

can do it. Uh. Any you know. One of the one of the most shocking things, most things will stick in your memory from from the reads book is that British officials in the Channel Island which we're taken over by the Germans, uh, gladly handed over Jews to the Nazis, the Brits during Brits during worldwide astonishing. Yeah, and it's also very useful when you're thinking about financial fraud and financial malthesis. If you understand Auschwitz, it's very easy to

understand what happened in en Royn. Everybody brought into the whole company thing and despite obvious in this year fraud, they managed to overlook it. Um. I know you mentioned the FIAT was a failure, but let's talk more professionally. Tell us a power the time you failed and what you learned from the experience. Well, you know the last two nonfiction books that have been published and sold, where one was a splendid Exchange which succeeded beyond my wildest

expectations in terms of reviews, sales, the speaking gigs. It continues to get me. Uh, it was wildly successful. And then the book that came after that, Masters of the Word, which we talked briefly about it was an absolute flop. I doubt it's sold five thousand copies. Really yeah? Uh? And and what that taught me is just how capricious publishing is. Are you equally satisfied with the final product? That's the whole point is is I had just as much fun writing both of them. I'm just as proud

of of both of them. And and what it taught me is that you can spend three or four year is writing a book and it can disappear almost without a trace. Uh. And that doesn't mean that the exercise wasn't worthwhile, because hopefully you're writing books for other reasons. What do you do for fun? What do you do when you're not writing books or researching in the library? Well, um, you know, uh, I lead I'm afraid of very ordinary life.

I'm your base acceptationtioneering and who enjoys his children and his grandchildren and traveling. Uh while I I still can uh. I I enjoy living in Portland, Oregon more than I can imagine. You can imagine. I live in a place where I can walk downtown and be there in fifteen minutes, or I can walk twenty minutes uphill and be in a Sequoia grove. Uh. And you know have have have first class Cuiscans and uh and begets right out in

my front door. The food in Portland is outstanding. I don't know if people realize that that should be on the foodie city. So it's every time I'm there, I come away that was it was really amazing restaurants. We have an office in Portland. It's really astonishing the food there. Yeah. So I love that. And of course, you know, the things that that I that I really enjoy doing are are the research, the the the process of putting a book together. It is just great fun under uncovering these

stories it almost no one knows about. So, so what's the next book that's going to be coming from you? The next book will be a modern remake, if you will, of Charles McKay's famous Extraordinary Popular Delusions in the Madness of Crowds or actually Memoirs of Extraordinary Popular Delusions in the Madness of Crowds. Uh. Let's got to be so

much fun to dive into. Oh yeah, and it's a book basically that covers finance, of course, the three Great bubbles of the seventeenth and eighteenth centuries, as well as all out of religious manias. Uh. And so that's what this book is, it's it combines three things. Is financial mania's religious manias, and then the neuropsychology and particularly the

evolutionary psychology that glues all of them together. But one of the things that I learned from my colleague Ben Carlson, who I know, you know, was that the Japanese um bubble that popped in nine made the Nasdaq bubble in two thousand look like child's play. It was like five or ten x what the NASDAK bubble was. It's it's stunning. Yeah. The Nikkei peaked very close to forty thousand, and I

think that it's at it's nadir. Uh. It was somewhere around five thousand, and I don't know what it is now, but it's somewhere in the mid teens right now, I think. But it was it was the equivalent of the S and P five hundred during the dot coms was about thirty two times. I think the nick was a hundred times earnings at its peak or even worse. Yeah, very very, very very close to that. And that's what you know.

People always talk about, my gosh, can the US stock market experience, Uh, what happened to the Japanese stock market post nineteen eighty nine, and the answer is it did of course. Uh In nine thirty two was the was the multiple that wildly out of whack, No, but the market fell by the S and P the the the dal Jones industrial average fell by about eighty eight percent, so it was the same order of magnitude of fall.

The reason why I think it's unlikely we're unlikely to see anything like that happened to the US market, and why it's more believable in Japan is simply because you know, in nineteen ninety nine we only had a pe of like well as trailing p I think of forty and a cape of thirty, or maybe it was the other way around, a cape of forty and a por trailing pe of thirty, whereas now we're at a trailing pe of somewhere around twenty in a trailing cape of somewhere

around what thirty? Yeah. Uh, So you know, it's much more believable that that happened in Japan that it will happen to us. And the cape. The rub on the Cape these days continues to be it's just gives you some insight into forward expectations, not a timing mechanism. It's it's been overvalued since something like eight percent of the time. Yeah. The one you finance way of saying it is that it's not a stationary parameter, okay, meaning that if you just look at how it works out of sample, it

works very poorly. Out of sample and sample it works. But if you do, for example, what what Staunton, marsh and Dimpson did, which is to look at it at the say the dividend yield UH in multiple countries, and then you just stop the analysis each and every year, you look back UH, and you devise a set of rules depending on you know, that are based on looking back at a given point, and then you look how it does forward. It does very poorly going forward and

in almost all countries. The one thing that that does work is is timing within countries, but that a different subject. So so out of sample is a big warning, UH to take the cape with a whole lot of grain assault exactly because you don't you don't know what the future distribution is going to look like. Alright, So our

final two questions. If a millennial or recent college graduate came to you and said they're looking for advice about going into either medicine and neurology or finance and writing. What sort of advice would you give that medicine is a much surer way of making a living than writing is, that's for sure. I would. I tend to look at writing as something you do to amuse yourself in your dotage. Uh, it's it's it's it's fun. But if if you've got kids to raise and colleges to pay for, I I

wouldn't become a writer. I would choose a much more solid profession. Live modestly. Uh, and then you know you can you can kick back and follow your blessing right if you feel like are. I've asked a number of doctors this question, and I'm curious as to your view. If your kids came to you and said they wanted a career in medicine, would when they were younger, would you have encouraged or discouraged them? Yeah? I would. I would encourage anybody who wants to go into real edison too.

It's it's a very rewarding profession and uh it's it's it's a much more difficult profession than when I was in it because of all the bureaucracy and not only that, but you know, back in the day you could work for yourself. Now you'll almost certainly be working for the

NBA from hell. Uh. Even even so, Uh, it's it's a it's a it's a fine profession that offers rewards that nothing else, no other professions that will provide you with And our final question, what is it that you know about the world of investing today you wish you knew when you first started out years ago. Well, there's this parlor game that economics like to play about how

risky your stocks? Uh. And we've all heard the rationales of you know, how how they get risky or less more or less risky with time, and that how that argument goes back and forth. But what I've learned that I wish I knew back then is that it's a stupid question to ask without also adding for a given investor of a given age. Right, So, if you are a twenty year old saver who has a lot of human capital and no investment capital and a fifty year

time horizon, stocks aren't the least bit risky. In fact, you should get down on your knees and pray for volatility and low returns all right. But once you know you're approaching your your geezer hood. Uh, stocks are are three mile Island toxic and you should be very approached them with with a great degree of caution. So I wished I had known when I was thirty years old that I could put acent of my savings into stocks and not worry at all about them. That makes perfect sense, Bill,

Thank you so much for doing this. This has been absolutely fascinating. We have been speaking with Bill Bernstein. He is the author of numerous books. Go to Amazon or barn to Noble or wherever you pick up your books and you can see any of the dozen or so UM offerings he has, and I highly recommend any or all of them have Splendor exchange. UM. It was really fascinating and because of that, I'm gonna have to go get your book on on Media and Words. I was

you said. It came and went so quickly. I don't even recall seeing that book come out, but this one I remember UM getting as soon as as it was published. So that thank you. Thank you for your time. UM. If you enjoy this conversation, We'll be sure to look up an Inch or down an Inch on Apple iTunes. And you can see any of the other two hundred and fifties such conversations we've had over the past five years. UM, we love your comments, feedback in suggestions right to us

at m IB podcast at Bloomberg dot net. I would be remiss if I did not thank the crack staff that helps put together these conversations each week. But Dina Parwana is my audio engineer slash producer. Michael Boyle as our producer slash booker. Attica val Brunn is our project manager. Michael bat Nick is our head of research. I'm Barry Ritolts. You're listening to Masters in Business on Bloomberg Radio.