Speaker 1: Bloomberg Audio Studios, podcasts, radio news.
Speaker 2: The News back loving you.
Speaker 3: How often have you thought about making major change in
Speaker 3: your career. You're going to give up some time, some effort,
Speaker 3: a lot of education, and potentially a lot of money.
Speaker 3: But if it pays off in the end, then it's
Speaker 3: a worthwhile thing to be true to yourself. On today's
Speaker 3: Out the Money, let's speak with William Bernstein. He began
Speaker 3: his career as a medical doctor, a neurologist who discovered
Speaker 3: he had a knack for investing and investment research, eventually
Speaker 3: opening Efficient Frontier Advisors. He is also the author of
Speaker 3: multiple books, The Intelligent Asset Allocator, Four Pillars of Investing, Investors,
Speaker 3: madeim Festo, and on and on. His most recent book
Speaker 3: is The Delusions of Crowd Bill Bernstein, welcome to add
Speaker 3: the Money. Let's just start with a quick question.
Speaker 1: You went to medical school. Did you expect to spend
Speaker 1: your whole life as a doctor?
Speaker 4: Heaven No, at least I didn't expect that that was
Speaker 4: going to happen. But you know, I happened to live
Speaker 4: in a country that doesn't have a functioning social welfare
Speaker 4: system or safety in it, and so I realized I
Speaker 4: was going to have to invest in save from my
Speaker 4: own retirement. And I went about it in the way
Speaker 4: that I thought any scientists would do, which is to
Speaker 4: read the peer reviewed literature, a basic textbooks, collect data,
Speaker 4: build models. And that led me into finance and eventually
Speaker 4: led me into writing about history, because you really can't
Speaker 4: do finance unless you have a good working knowledge of
Speaker 4: the history. And I found that I enjoyed reading and
Speaker 4: writing about it.
Speaker 1: So this began, as you thinking I need to plan
Speaker 1: for my own finances. What was the aha moment that, hey,
Speaker 1: I now have a new knowledge base and a new
Speaker 1: skill set. Maybe I could share this with other people.
Speaker 4: I'll give credit to a guy you may have heard
Speaker 4: of named Frank Armstrong, who was one of the early
Speaker 4: efficient market passive indexing gurus. He was another financial advisor,
Speaker 4: and after I had built some of my models, he said,
Speaker 4: you know, Bill, you need to put all this stuff online.
Speaker 4: You've got a basic text book that you wrote. You
Speaker 4: need to put that online as well, which he had
Speaker 4: already done. You know this is we're talking more than
Speaker 4: thirty years ago. And you do that and pretty soon
Speaker 4: you find that you're getting called by journalists. You're getting
Speaker 4: called by other investors, and one thing leads to another
Speaker 4: and the next thing, you know, you're managing money and
Speaker 4: writing books.
Speaker 1: So what was what was the moment when this went
Speaker 1: from I need to take control of my own finances
Speaker 1: to hey, maybe I don't want to be a neurologist anymore.
Speaker 1: Maybe my career lay in managing money for other people.
Speaker 4: Well, there are two kinds of doctors. The overwhelming majority
Speaker 4: of the doctors probably you know, sixty seventy percent of
Speaker 4: them realized by age fifty or so that it's a
Speaker 4: tough game and they're going to get.
Speaker 1: Very tough and it's gotten worse, hasn't it.
Speaker 4: It has not gotten any easier, that's for sure. And
Speaker 4: they're going to get out of it as soon as
Speaker 4: they can afford to do it. And you know, and
Speaker 4: then a third of them are the kinds of you
Speaker 4: know doctors, God bless them who love what they do
Speaker 4: and get carried out first at age seventy eight or so,
Speaker 4: and I fell into the first category. So when the
Speaker 4: opportunity came to do something that, you know, put mean
Speaker 4: too contact with very intelligent people all day long, having
Speaker 4: fun conversations and dealing with fun concepts that I left
Speaker 4: at the chance.
Speaker 1: So at what point did you say, Hey, this is
Speaker 1: going to become financially remunerative and I'm not just giving
Speaker 1: up a well paying job, although it comes with a
Speaker 1: lot of student loans and obligations in debt. How long
Speaker 1: did it take you to reach that point where, oh,
Speaker 1: I can make a go of this.
Speaker 4: It took about three or four years from the time
Speaker 4: the first book came out, and you know, it became
Speaker 4: a parent that I could make a decent living managing
Speaker 4: money in writing. You know, I mean, who doesn't want
Speaker 4: to make your living? You know? Writing? I mean that's
Speaker 4: everybody's dream job. And I fell into my lap.
Speaker 1: I guess, okay, so A, you're preaching to the choir,
Speaker 1: But b most people don't love writing. And what's kind
Speaker 1: of in interesting is how solitary the process of writing is.
Speaker 1: And all of us who write in public do so
Speaker 1: for that back and forth, for that conversation. For you,
Speaker 1: writing became a pathway to a career change. I had
Speaker 1: the same sort of experience. Did you have any doubts
Speaker 1: or fears? How did you manage that?
Speaker 4: Oh? My god, I have a full I still have
Speaker 4: a full blown case of imposter syndrome. Really, Oh my god, yes,
Speaker 4: of course, Uh you know. I mean I think I
Speaker 4: told you maybe several years ago about the experience I
Speaker 4: had of getting invited to a conference that was hosted
Speaker 4: by the DNI, the Director of National Intelligence, and here
Speaker 4: I am, you know, with these spokes and four stripers
Speaker 4: talking about national security. I mean, you know, if that
Speaker 4: doesn't induce, you know, a full blown case of imposter syndrome,
Speaker 4: I don't know what what does. See.
Speaker 1: My assumption is that they're bringing someone in from a
Speaker 1: different field because very often knowledge, adjacency and just seeing
Speaker 1: the world from a different perspective can provide insights to them.
Speaker 4: I mean, with luck, maybe that happened. I don't know
Speaker 4: that it actually did the way I dealt with it,
Speaker 4: as I picked the subject which was as remote from
Speaker 4: modern geopolitics as I can find. So I talked about
Speaker 4: the strategy of the geostrategy of the Athenian grain trade.
Speaker 1: Huh, fascinating. And these guys aren't experts in that sort
Speaker 1: of history, and they're obviously military and national intelligence repercussions
Speaker 1: to that. So I don't understand this some imposter syndrome
Speaker 1: you're you're referring to. But but let's talk about other mistakes.
Speaker 1: You know, did you when you made this transition? Were
Speaker 1: their mistakes made? How did you recover from them? How
Speaker 1: did you get past sort of being a novice with
Speaker 1: a non traditional background in the world of investment.
Speaker 4: Well, you know, before I took started to take finance
Speaker 4: seriously seriously, I made all the mistakes that rookie investors make.
Speaker 4: I invested in hot funds, I played futures, and and
Speaker 4: you know, you know, experience is a fine teacher, so
Speaker 4: you learn, you learn from those things, and of course
Speaker 4: I learned, you know, in the past twenty or thirty years,
Speaker 4: I absorbed certain truths that I really didn't understand when
Speaker 4: I started out.
Speaker 1: I love I think it's Howard Marx's line, experience is
Speaker 1: what you get when you don't get what you want. That, right,
Speaker 1: seems seems kind of appropriate. So along the line, what
Speaker 1: sort of tools did you create? Did you develop systems
Speaker 1: for managing assets and dealing with clients or checklists? Everybody
Speaker 1: has their own set of tools they use. What did
Speaker 1: you create?
Speaker 4: Well, I had an interesting experience, which is, you know,
Speaker 4: very early on, I understood the importance of maintaining a
Speaker 4: policy allocation and rebalancing towards it. So at one asset
Speaker 4: quested particularly well, you bought, you sold it to sell
Speaker 4: it down to its policy, and when it did poorly,
Speaker 4: you did the opposite. You bought and went back up
Speaker 4: to your policy. And one of the funds that I
Speaker 4: used was the old Vanguard Precious Metals Fund, which back
Speaker 4: in the day was a real, honest to god, low
Speaker 4: cost gold and precious metals equity fund. And what I
Speaker 4: found was that simply by rebalancing it, the internal rate
Speaker 4: of return I got out of it was about five
Speaker 4: percent higher than the than the dollar weighted excuse me,
Speaker 4: the time weighted return. So in other words, I had
Speaker 4: a positive gap, not a negative gap, and I wanted
Speaker 4: to know where that five percent came from. It didn't
Speaker 4: matter how I did it, whether I balanced monthly or
Speaker 4: quarterly or annually, or I used thresholds year after year
Speaker 4: that five percent. Some years it was four percent, some
Speaker 4: years was seven percent. But an average sum five percent.
Speaker 4: Couldn't figure out where it came from. So I worked
Speaker 4: out the canonical math of it. Okay, And if you
Speaker 4: understand the mathematics of rebalancing where that bonus comes from,
Speaker 4: then you understand acid allocation, and if you understand acid allocation,
Speaker 4: you understand finance. It's just that simple. So that's that
Speaker 4: was that was sort of that was that was that
Speaker 4: was sort of the the insight that I had early
Speaker 4: on that had been able to me to write about finance.
Speaker 1: So so to oversimplify that tool. When you're rebalancing, you're
Speaker 1: selling a little bit of what got expensive, you're buying
Speaker 1: a little bit of what got cheap. And is that
Speaker 1: where the magic percentage came from, where the bonus came from.
Speaker 4: With precious metals, it surely does. And precious metals is
Speaker 4: a is a special case. It doesn't work quite as
Speaker 4: well for the more common, the more common asset classes.
Speaker 4: But the really nice thing about golden precious metals is
Speaker 4: that it is subject to animal instincts. So there are
Speaker 4: some time periods when you simply can't give gold precious
Speaker 4: metals equities away, and people are saying, this really doesn't
Speaker 4: belong in your portfolio anymore, and I would read, I
Speaker 4: would read experts, you know, talking about, yeah, gold golden
Speaker 4: precious metals really doesn't belong in your portfolio anymore. And
Speaker 4: then you have other times when you know the gold
Speaker 4: bugs are hopping. Uh, the dougs are quacking, and they
Speaker 4: have to be fed. And those are the times when
Speaker 4: you feed them and you sell them and you sell
Speaker 4: your your your precious metals and your your your your
Speaker 4: your precious metals equities. I mean, there was a I
Speaker 4: saw a wonderful article in the journal a couple of
Speaker 4: weeks ago.
Speaker 1: I saw, I saw.
Speaker 4: Yeah, and I saw this John Yeah, and well it
Speaker 4: was that and it was about him and a number
Speaker 4: of other people. I think it's the same article you're
Speaker 4: talking about. And I saw a wonderful three word term,
Speaker 4: which is first time investor. Anytime you see first time investor, uh,
Speaker 4: you know around then ascid class, you know that things
Speaker 4: are getting really propty.
Speaker 1: So the funny thing is, as soon as I saw
Speaker 1: that journal article that referred to after the big short
Speaker 1: where Paulson it was really one of his lieutenants is
Speaker 1: the guy who created that bet. Paulson just was the
Speaker 1: owner of the firm, and Pat Baghini Paganini is the
Speaker 1: guy who had done that bet, made an ungodly amount
Speaker 1: of money and rolled it into gold. And that was
Speaker 1: fifteen years ago, and the journal is saying the trade
Speaker 1: is finally working out. I'm like trade, it's fifteen years.
Speaker 1: The SMP has out performed gold over the past fifteen
Speaker 1: years by like five x. How is this anything but
Speaker 1: a disastrous trade. That's a little less disastrous.
Speaker 4: Yeah, it's funny that you mentioned that, because almost exactly
Speaker 4: fifteen years ago, Jason has Wagge interviewed me about Ron
Speaker 4: Paul's portfolio, which was very heavy in gold and precious metals. Now,
Speaker 4: the article came, i believe at the end of nine
Speaker 4: to twenty eleven, when gold was coming off of a.
Speaker 1: Run of very high nineteen hundred and change or so,
Speaker 1: if memory serves.
Speaker 4: Yeah, and you know, Jason and I just got absolutely
Speaker 4: flamed in the comments section of that article. It verged,
Speaker 4: you know, pretty much towards over anti semitism in spots
Speaker 4: and you know, Jews and gold and all that, and
Speaker 4: that was that was a pretty good marker. And that
Speaker 4: was exactly the same time period that you're talking about.
Speaker 4: You start from twenty eleven, it was a disaster. You
Speaker 4: start from twenty fifteen. Gold's done very well, thank you.
Speaker 4: But gold looked very different in twenty fifteen than it
Speaker 4: did at the end of twenty eleven.
Speaker 1: Huh, it's it's pretty amazing that. I guess I used
Speaker 1: to think people's definition of long term was too short.
Speaker 1: Like when someone says, well, I'm a long term investor,
Speaker 1: I'm an investor for a couple of years, I'm like, no, No,
Speaker 1: you got to think in terms of decades, and now
Speaker 1: fifteen years is a trade that is where out It's
Speaker 1: really kind of amusing. But let's bring this back to
Speaker 1: your career change. There are very specific skills that you
Speaker 1: bring to the table as both a medical doctor and
Speaker 1: a neurologist. Any of those skills transferable? How did you
Speaker 1: leverage that? Well?
Speaker 4: You would think that being a neurologist would help you
Speaker 4: with behavioral fiance. It really doesn't, because the everyday practice
Speaker 4: of neurology has almost nothing to do or relatively little
Speaker 4: to do with with behavior I the kind of neurology
Speaker 4: I did is something that's referred to disparagingly in the
Speaker 4: Greatest Chicken neurology, which is that which is nex and
Speaker 4: backs okay.
Speaker 1: Nex send backs okay, and and d way.
Speaker 4: You know, people talk to me about the neurosciences and
Speaker 4: about all these brilliant people, you know, Konoman and firsty
Speaker 4: and spa spurry and gazanaga. And what I like to
Speaker 4: say is, no, those guys are you know Da Vinci
Speaker 4: and Michaelangelo. You know I was Sherwin Williams. It really didn't.
Speaker 4: It really didn't help me all that much. Where it
Speaker 4: did help me with the basic scientific treaming, it brought
Speaker 4: me respect for data and for updating your priors. When
Speaker 4: when the data contradict your your deeply held beliefs, maybe
Speaker 4: your deeply held beliefs need to be reevaluated.
Speaker 1: Well that's always a challenge. So let me throw out
Speaker 1: a touchy question at you. Doctors have a notorious reputation
Speaker 1: amongst finance people for being terrible investors. And my pet
Speaker 1: thesis is their nurses and staff or look up to them,
Speaker 1: their patients think their God. How on earth can those
Speaker 1: people bring any level of humility to a world that
Speaker 1: is so unknown and so challenging. Indexings is in admission.
Speaker 1: I'm not going to be a Warren Buffett or Peter Lynch.
Speaker 1: I'm not going to be a stock picker a market
Speaker 1: time timer. What's your experience dealing with doctors, because you
Speaker 1: clearly don't fit that stereotype amongst a lot of financial advisors. No,
Speaker 1: doctors can be difficult.
Speaker 4: That's a fair that's a fair observation. Surgeons tend to
Speaker 4: be more overconfident than than than than medically oriented positions.
Speaker 1: Hey, we're cutting a person open and we think it'll
Speaker 1: all work out. How can you not be over confident?
Speaker 3: Exactly?
Speaker 4: And then you know, there's the there's the gender aspect
Speaker 4: of it as well, which is male doctors are much worse. Uh,
Speaker 4: most people are happier by the way, with female doctors,
Speaker 4: probably for the very same reason as one of my
Speaker 4: neurological colleagues once, a female neurological colleague once told me
Speaker 4: that testosterone does wonderful things for reflex time and muscle
Speaker 4: maacks mass, but for judgment not so much. Now, that's
Speaker 4: that's happening. It's the overconfidence aspect. But the real reason,
Speaker 4: and I think actually even the bigger reason why physicians
Speaker 4: do so poorly, is they do treat it like a
Speaker 4: serious subject. Okay, you know you wouldn't you know, before
Speaker 4: you're even allowed you're a patient, you have to master
Speaker 4: the basic sciences. You know, your anatomy and your physiology
Speaker 4: and your pharmacology and so forth. And they never bother
Speaker 4: to take the time. And the way I explain it
Speaker 4: to them is without treating finance as a serious subject
Speaker 4: worthy of academic study, they're trying to do brain surgery
Speaker 4: by reading the USA today. It just doesn't work.
Speaker 1: Huh. That's that's really really insightful. So last question, if
Speaker 1: someone were going to ask you for advice about undertaking
Speaker 1: a career change, what sort of advice would you give them.
Speaker 4: Well, it's it's a complex bit of calculus, which is
Speaker 4: that you do have to be financially secure and change
Speaker 4: your career. Okay. One of my favorite New Yorker cartoons
Speaker 4: is the typical, you know, homeless guy in the street
Speaker 4: with the tin cup of his sign says, followed my bliss.
Speaker 4: All right, so don't don't follow your dress when you're
Speaker 4: when you're too young. You know, if you have to
Speaker 4: spend ten or twenty years doing something you don't like
Speaker 4: to become financially secure. Uh, And you understand that money
Speaker 4: doesn't buy things, it buys time and economy. Get that
Speaker 4: time and economy and become financially secure and then you
Speaker 4: can do whatever the hell you want to do.
Speaker 1: Great stuff, Bill, Thanks, We have been speaking with William Bernstein,
Speaker 1: co founder Officient Frontier Advisors and author of so many
Speaker 1: great books on economic history, Birth of plenty, splendid exchange,
Speaker 1: masters of the word, delusions of the crow of crowds,
Speaker 1: On and on. You're listening to Bloomberg's At the Money, do.
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