Speaker 1: This is Master's in Business with Barry rid Holts on
Speaker 1: Bloomberg Radio. This week on the podcast, I have an
Speaker 1: extra special guest, William J. Bernstein, author of so many
Speaker 1: fascinating books about finance, as well as being a practitioner
Speaker 1: UH Efficient Frontier Advisors runs a nice lug of money
Speaker 1: for ultra high net worth clients. What's so fascinating about
Speaker 1: Bernstein is how he began his career as a neurologist
Speaker 1: and then transition to being a financial theorist and and
Speaker 1: money manager and book author. Really an amazing um career
Speaker 1: path and and a fascinating conversation with no further ado.
Speaker 1: My conversation with William Bernstein. I'm Barry Ridholts, your listening
Speaker 1: to Masters in Business on Bloomberg Radio. My special guest
Speaker 1: this week is William Bernstein. He began his career as
Speaker 1: a neurologist before becoming a financial theorist and investment advisor.
Speaker 1: He is the author of nearly a dozen books, many
Speaker 1: of which cover finance, including The Intelligent Asset Allocator, The
Speaker 1: Four Pillars of Investing, The Investors Manifesto, and several others.
Speaker 1: He has also written several works of historical interest including
Speaker 1: a splendid exchange all about global trade and the birth
Speaker 1: of plenty, as well as masters of the word. William Bernstein.
Speaker 1: Welcome to Bloomberg. Happy to be here, Barry. So, I've
Speaker 1: been looking forward to this conversation for quite a while.
Speaker 1: You and I have been emailing for several years. Um,
Speaker 1: you have such a fascinating background and so unusual. Before
Speaker 1: you became a professional investor and an author, you're a neurologist.
Speaker 1: How long did you do that for and what made
Speaker 1: you transition into finance. Well, I did it more or
Speaker 1: less for a third of a century. And I transitioned
Speaker 1: into finance and nonfiction writing by virtue of the fact
Speaker 1: that I live in a country that doesn't have a
Speaker 1: functioning social welfare system, and so I had to uh
Speaker 1: save and invest on my own. And I approached the
Speaker 1: problem in a way that I thought that any person
Speaker 1: with scientific training would do, which is that you examine
Speaker 1: the peer reviewed literature, You read the basic texts, you
Speaker 1: collect data, you built models. And this got me to
Speaker 1: about the mid nineteen nineties, and by that point I
Speaker 1: realized that I had created something that was actually of
Speaker 1: use too small investors, and so I began writing finance,
Speaker 1: and as I'm sure we'll get into later in the interview,
Speaker 1: one of the essential skills that any investor should have
Speaker 1: as a working knowledge of financial history. And I discovered
Speaker 1: that I enjoyed writing history, and so I segue uh
Speaker 1: into that do you miss medicine at all? I miss
Speaker 1: the camaraderie, I miss dealing, the personal interaction with patients,
Speaker 1: which is golden uh. And and you know I I
Speaker 1: missed the knowledge base and the competence that you exert.
Speaker 1: But the day to day practice of medicine does wear
Speaker 1: on you after a while. Uh. And there comes a
Speaker 1: point I think in every doctor's career when or at
Speaker 1: least most physicians careers, when they decided to call it quits.
Speaker 1: So one of the things you did you mentioned data.
Speaker 1: You assembled an asset class database before they were really
Speaker 1: a philiple publicly. Uh. Why did you go about doing this?
Speaker 1: And where did you get your data from? I basically
Speaker 1: begged people uh for for data uh. And I just
Speaker 1: collected as many data series as I could, and I
Speaker 1: wanted to basically create what's called a mean variance optimizer,
Speaker 1: which is something trades off return and risk measured as
Speaker 1: standard deviation or variance and as much data as you
Speaker 1: can throw into that is good. And so that was
Speaker 1: why I collected all of those data. Now it turns
Speaker 1: out that that sort of exercises of fools errand, as
Speaker 1: I very quickly figured out. But it's still a useful skill,
Speaker 1: and it was a useful thing to do for small investors. Well,
Speaker 1: why is it a fool's errand other than the fact
Speaker 1: that the data is relentless and it never stops, it's
Speaker 1: a fool's Errand because the output of a mean variance
Speaker 1: optimized or that is, what are the most efficient portfolios?
Speaker 1: Giving you the most return for the least amount of
Speaker 1: risk or vice versa, giving you the least risk for
Speaker 1: a given amount of return is extremely sensitive to the
Speaker 1: data that you put into it. So change the return
Speaker 1: of an asset class by percent or two in either direction,
Speaker 1: and it might completely dominate a portfolio or it might
Speaker 1: completely fall out of the portfolio. These things started to
Speaker 1: come onto people's desktops UH in the early nineteen nineties,
Speaker 1: and when they tossed in historical data, what did they find. Well,
Speaker 1: they found that the most efficient portfolios were heavy in
Speaker 1: Japanese stocks UH and precious metal stocks, case closed. That's
Speaker 1: all you have to know. Uh. And TPS nine was
Speaker 1: the peak of the Japanese market and has yet to
Speaker 1: recover those heights since exactly. And what some wags refer
Speaker 1: you know to to a mean variance optimizer is as
Speaker 1: an error maximizer. Just for that reason. That's really great.
Speaker 1: So so you create a website called the Efficient Frontier.
Speaker 1: What made you do this and what made you decide
Speaker 1: to start putting all of your writings up in that
Speaker 1: one place. Well, I'll give credit to a man by
Speaker 1: the name of Frank Armstrong who is a financial advisor
Speaker 1: in Florida. Uh, and he had done pretty much the
Speaker 1: same thing. He hadn't collected the data, but he was
Speaker 1: on the web before any you know, financial writing, before
Speaker 1: anybody else was. And this goes back to well before
Speaker 1: and uh, he encouraged me to do it. I had,
Speaker 1: you know, after I completed the exercise, I wrote a
Speaker 1: book called The Intelligent act Allocator, my first book, and
Speaker 1: I approached a bunch of publishers with it, and of course,
Speaker 1: being someone with no experience and no credentials, you know,
Speaker 1: just just a manuscript coming in over the trans and
Speaker 1: it got rejected by thirty thirty publishers, and Frank told me, hey,
Speaker 1: just put the book on the web, and that's basically
Speaker 1: how it took off. That was what was your first
Speaker 1: published book? If that wasn't your first book, that was it.
Speaker 1: That was it? So so you eventually got a publisher
Speaker 1: for that. Yeah. The story is is that a man
Speaker 1: by the name of Robert Barker, who was a reporter
Speaker 1: for Business Week, actually came to interview me in about
Speaker 1: uh and I told him the story and I can
Speaker 1: still see look on his face as I told him
Speaker 1: the story about the publishers, and he said, dear God,
Speaker 1: please tell me that one of them wasn't McGraw hill.
Speaker 1: And I said, well, yes it was. And he then
Speaker 1: owner of Business Week now by Bloomberg LP right, and
Speaker 1: he hit his you know, sort of made a show
Speaker 1: of mock, putting his face in his hands, shaking his head.
Speaker 1: And then six weeks later I got an offer from
Speaker 1: McGraw hill. He swears he has nothing nothing to do
Speaker 1: with it, but of course I didn't believe him. That.
Speaker 1: That's absolutely hilarious. So so, given the nature of data
Speaker 1: now being ubiquitous, how is this changing the world for
Speaker 1: for investors? And for advisors. Well, uh, you know, I
Speaker 1: think it was Bernard Baruk who said that something that
Speaker 1: everyone knows isn't worth knowing. Uh, So that if everybody
Speaker 1: has these data and can operate on them, uh, then
Speaker 1: they become nearly nearly worthless. Gene Fama makes the point,
Speaker 1: uh that everybody is basically working off the same data
Speaker 1: as you know, going back to basically nineteen six. Uh.
Speaker 1: And it's you have to be very cautious about different
Speaker 1: studies that are still using based on the same database,
Speaker 1: because I think it was Samuelson who said, we only
Speaker 1: have two hundred years of history. Uh, and that's not
Speaker 1: the complete that's not the complete sample. I think Roger
Speaker 1: Ibbotson and the folks said, CRISP just backdated that from
Speaker 1: six back another hundred and fifty or so years. Not
Speaker 1: that there was a lot of data back then. It was, um,
Speaker 1: a whole lot less companies and a whole lot less trading.
Speaker 1: But the full run of of publicly traded US companies
Speaker 1: I think goes back now to the early eighteen hundreds
Speaker 1: if I'm remember that correctly. Yeah. Yeah, And and there
Speaker 1: are people who've who've who've got probably far less uh
Speaker 1: detailed databases than than Rogers. And of course you can
Speaker 1: go you know, you can look at English stocks and
Speaker 1: you you can at least get monthly and annual returns
Speaker 1: all the way back to the at seventeenth century. So
Speaker 1: one of the things you you've written, which I find
Speaker 1: quite intriguing, is that most returns are determined by the
Speaker 1: asset allocation of the portfolio rather than the assets selection.
Speaker 1: Explain that, well, there are risky assets and there are
Speaker 1: risky riskless assets, you know, Tobin separation theorem. Uh. And
Speaker 1: that's that's how I view portfolios. Uh. Is You've got
Speaker 1: the stuff that helps you sleep at night, and you
Speaker 1: want to keep that as safe as possible. Things with
Speaker 1: a government guarantee. Uh. That's you know, that's next month's
Speaker 1: grocery money. Uh. And then there's the stuff which you're
Speaker 1: really not going to be touching or shouldn't be touching
Speaker 1: for decades, and that's the risky stuff. Uh. And that's
Speaker 1: really all there is to it. And I think that
Speaker 1: I think it is a bit of a mistake, not
Speaker 1: a serious mistake, but a bit of a mistake to
Speaker 1: mix the two. So junk bonds, for example, corporate bonds
Speaker 1: in general, I think are our mistake. Anything where you're
Speaker 1: reaching for yield is not optimal. That's correct. Yeah, Yeah,
Speaker 1: Duration I'm sort of neutral about. You can make the case,
Speaker 1: as you well know, that duration is certainly a risk,
Speaker 1: particularly in an inflationary environment, but when the excrement really
Speaker 1: hits the ventilating system, duration is generally a good thing.
Speaker 1: Let's talk a little bit about physicians and why they're
Speaker 1: such terrible investors. My instinct is to say it's ego
Speaker 1: and an excess of misplaced confidence. I think you're gonna
Speaker 1: say something else, what why are doctors such bad investors? Well,
Speaker 1: you've you've hit two of the high points. But the
Speaker 1: major reason I think is that they don't take investing seriously.
Speaker 1: A physician, and I think most physicians who are properly
Speaker 1: trained will not treat so much as a cold without
Speaker 1: a detailed review of the peer reviewed literature, discussing things
Speaker 1: with their their colleagues, uh, and you know, a thorough
Speaker 1: review of the database that's available to them. On the
Speaker 1: other hand, physicians, when they approach investing will do it
Speaker 1: by you know, reading the Wall Street Journal or USA
Speaker 1: Today or Kiplinger's Uh. And the way I explain that
Speaker 1: to them is you know, when you have to treat
Speaker 1: someone with a serious disease, you don't get your information
Speaker 1: from psychology today or USA today. You go and you
Speaker 1: look at the most authoritative sources. Investing is exactly the
Speaker 1: same sort of subject. It's a serious endeavor. And just
Speaker 1: like in order to do medicine, you have to start
Speaker 1: with the basics anatomy, physiology, pathology, pharmacology. Uh so too
Speaker 1: when you approach investing, you should exert a similar amount
Speaker 1: of effort. You should learn about the theory of investing.
Speaker 1: You should learn about the history of finance and of investing.
Speaker 1: You should learn about its psychology. And lastly, you have
Speaker 1: to learn about the business aspects of investing the people
Speaker 1: who are selling you the products. That sounds a lot
Speaker 1: like the four pillars of investing. Those are the four
Speaker 1: broad categories theory, history, psychology, and actual business. The brand
Speaker 1: envelope is in the mail, so let's talk a little
Speaker 1: bit about that. How did you come to the conclusion
Speaker 1: that those four um broad subject areas are what underlies
Speaker 1: each investors or should underlie each investor's theory, the four
Speaker 1: pillars that support their portfolio well by observing the mistakes
Speaker 1: that people make, and I found that people made four
Speaker 1: basic mistakes. Number one is they didn't understand market theory,
Speaker 1: financial theory. They didn't understand that there's a correlation between
Speaker 1: risk and return. It's the almost like the law of
Speaker 1: gravity in investing. And they didn't understand the theory of diversification. UH.
Speaker 1: And they didn't understand basic portfolio theory how you mix assets. Secondly,
Speaker 1: they didn't understand the history UH. And that came whom
Speaker 1: uh during the tech bubble of the late nineteen nineties,
Speaker 1: when people had absolutely no idea that they were living
Speaker 1: through something that had happened many times before. Uh. There
Speaker 1: was a script to the movie, and if you read
Speaker 1: the script, you knew how the movie ended. UH. And
Speaker 1: of course of the people who invested in the nineties
Speaker 1: did not know how that particular movie movie ended. There's
Speaker 1: a psychological aspect of investing which you've alluded to. People
Speaker 1: become overconfident, and it's not just that they're overconfident about
Speaker 1: their ability to invest, but they're also overconfident about their
Speaker 1: ability to bear risk. They throw, if they're smart, they
Speaker 1: throw something into a spreadsheet, they throw a simulation, and
Speaker 1: there was spreadsheet and they say, ah, here, I've lost
Speaker 1: thirty or forty percent of my money but only lasted
Speaker 1: for a brief period of time. I can ride that through, UM,
Speaker 1: but there's a big difference between doing that in real
Speaker 1: time and doing that in a spreadsheet. And way I
Speaker 1: like to describe that is it's kind of like the
Speaker 1: difference between crossing an airplane and a flight simulator and
Speaker 1: doing it for real. Uh. Your your your your pucker
Speaker 1: factor as pilots like to call it, uh changes and
Speaker 1: then finally, UH, what you also uh find is that
Speaker 1: physicians and a lot of people really don't understand the
Speaker 1: conflicts of interest that are inherent in the business. Which
Speaker 1: is a very polite way of saying that the financial
Speaker 1: services industry uh maybe the country's largest repository of criminal activity. Well,
Speaker 1: let's hold aside the actual criminal activity and look at
Speaker 1: what's legally extracted in terms of fees. There was a
Speaker 1: big debate about the fiduciary rule UM, coming from the
Speaker 1: last administration to this one that people who were in
Speaker 1: the business of managing other people's money argues, the camp
Speaker 1: that I'm in should behave like doctors and lawyers and
Speaker 1: account is where the client's best interest has to come first.
Speaker 1: But a lot of Wall Street thinks that that is problematic.
Speaker 1: It will impact fees at will impack services. What's your
Speaker 1: view on the fiduciary rule. Oh, I think it's a
Speaker 1: superb idea, and I think it's only a start. I
Speaker 1: think the odds that you know, we're going to see
Speaker 1: that in this administration, whether it lasts another two or
Speaker 1: six two or six years, is about the same as
Speaker 1: you and my starting at shortstop for the Yankees. I
Speaker 1: got a good glove. Okay, well, good, I'm I'm, I'm
Speaker 1: I'm you know, I'm short and I can't jump the
Speaker 1: rotator cuff. I won't be able to anyone who's fast
Speaker 1: will beat the throw to first. But other than that,
Speaker 1: but but there's there's certain things that should just flat
Speaker 1: out be, you know, felonies. It should be a felony
Speaker 1: to place, for example, an insurance product within a retirement account. Okay,
Speaker 1: so wait, you don't think putting an expensive tax defer
Speaker 1: annuity in a four oh three B or otherwise tax
Speaker 1: DEFEROD account is problematic? You you have an issue with that,
Speaker 1: I'm afraid, I'm afraid I do. Uh And you know,
Speaker 1: and I think there's certain products that should just flat
Speaker 1: out the be outlawed. I think that, you know, uh,
Speaker 1: double and triple and inverse H E T F s
Speaker 1: are basically a mathematically certain way in the long term
Speaker 1: of losing money. UH. And the rationales that are given
Speaker 1: further use are that while they're useful for short term timing,
Speaker 1: well you shouldn't be doing that either, you know. I
Speaker 1: mean that's you know, short term timing of the market
Speaker 1: is is one of those activities that's up there with
Speaker 1: with high risk sex and UH and skydiving and visiting
Speaker 1: a saudy consular. UH. If you're if you're an American journalist,
Speaker 1: is exactly yes, you know it's funny. Um, I we'll
Speaker 1: we'll move this to the back of the segment. But
Speaker 1: I was doing research on four oh three B for
Speaker 1: a column I was writing for Bloomberg, and I discover ward,
Speaker 1: this is your point is so well taken about history
Speaker 1: impacting how you think about things. As it turns out,
Speaker 1: the four H three B the retirement plan for teachers
Speaker 1: for state workers, for anybody who works for a charity
Speaker 1: or nonprofit. It predates four O one case by decades
Speaker 1: and was passed by Congress to sort of apparently a
Speaker 1: number of charities were doing these all insurance based products
Speaker 1: for their employees. They were inexpensive, they were tax deferred.
Speaker 1: There was no other alternative, and Congress wanted to extend
Speaker 1: that to everybody, including people who worked in various churches.
Speaker 1: And that's sort of the history of four H three B.
Speaker 1: And once the rules were changed and you you had
Speaker 1: this tax deferral built in and there was no longer
Speaker 1: need for an insurance product, the momentum in the infrastructure
Speaker 1: around that didn't go away. And that's part of the
Speaker 1: reason we see four three bees jam fold of overpriced,
Speaker 1: inappropriate tax deferd annuities that are better off you know, nowhere,
Speaker 1: but certainly not in a a tax deferred um nonprofit
Speaker 1: retirement account. It's quite fascinating. I thought I would I
Speaker 1: would mention that. I just thought it was really interesting.
Speaker 1: All right back to where we were. Um, So, have
Speaker 1: your thoughts and ideas changed about asset allocation over time
Speaker 1: or was the original research compelling? And you've you've stayed
Speaker 1: with where you began a good couple of decades ago.
Speaker 1: I haven't changed my my point of view very very much.
Speaker 1: I mean, one of the sort of sardonic things I
Speaker 1: like to say about finance and how it's different from
Speaker 1: other serious fields of endeavor, is it, if you want
Speaker 1: to be a good doctor, you've got to internalize thousands
Speaker 1: of uh medical articles uh and pieces of research. The
Speaker 1: same thing with you know law and and all the
Speaker 1: case law you you have to know. But I'm pretty
Speaker 1: sure that that any competent practitioner could put up a
Speaker 1: list of two dozen peer reviewed articles that if you
Speaker 1: knew them, uh you and you had fully internalized them, uh,
Speaker 1: you would know pretty much all that you have to
Speaker 1: know at a practical level. So that's another way of saying,
Speaker 1: there's not much new that comes out uh every year. Uh.
Speaker 1: That's that's worth that's worthwhile. I mean, just the past
Speaker 1: several months, there was an article published by the Abu
Speaker 1: Dhabi Investment Authority on shared delution and long term equity returns.
Speaker 1: Very important article because it showed that in the long term,
Speaker 1: it's delution of shares or its opposite net buy backs
Speaker 1: that determine returns and so you can explain, for example,
Speaker 1: the really just awful returns of Chinese stocks. This is
Speaker 1: a market with with with a lot of economic growth
Speaker 1: and back of it. But the returns have been about
Speaker 1: the worst of of any large national market be cause
Speaker 1: of the delution. On the other hand, when you look
Speaker 1: at the winners over the past hundred years, you know,
Speaker 1: countries like the US, Sweden, Canada, the UK, Australia, South Africa,
Speaker 1: those have been the countries that have deluded their share
Speaker 1: pools the least. Quite fascinating. So let's talk a little
Speaker 1: bit about the efficient Frontier Advisors LLC, where you manage assets.
Speaker 1: What motivated you to shift from being a doctor to
Speaker 1: an asset manager. Well, when you publish finance books and
Speaker 1: you find yourself, you know, quoted in national media, people
Speaker 1: start asking you to manage money. It's it's that simple. Uh.
Speaker 1: And so at a certain point you just can't say
Speaker 1: no anymore. Pretty much, Yeah, pretty much. And some people
Speaker 1: do say now, but I I didn't, And I was
Speaker 1: fortunate enough to be in contact with someone who already
Speaker 1: had an advisory service h up and running, a woman
Speaker 1: by the name of Susan Sharon, and uh we got
Speaker 1: together on the internet. Uh, and we've been in business
Speaker 1: for the past twenty one years. Wow, that's quite interesting.
Speaker 1: So you describe this as a boutique investment advisory UM
Speaker 1: intentionally designed for a limited number of clients. What what's
Speaker 1: the thinking there? Well, the thinking is that both of
Speaker 1: us have already had careers, uh, and we're at an
Speaker 1: age when we don't want to do anything. Uh that
Speaker 1: isn't fun. Uh. And it's not fun managing money for
Speaker 1: people who don't know anything about finance. So we restrict
Speaker 1: our practice to people who have a solid basis of
Speaker 1: knowledge of financial theory and of financial history. Uh. But
Speaker 1: I have to I have to interrupt you there. So
Speaker 1: it's more than just hey, you need a twenty million
Speaker 1: dollar minimum. It's you have to understand what we're talking
Speaker 1: about and be familiar with this so you get what
Speaker 1: we're doing with your capital. Is Is that what approaches? Well? Sure,
Speaker 1: because you know, come two thousand and eight, two thousand
Speaker 1: and nine, we don't feel like being woken up at
Speaker 1: three am eight Right. So just in the broadest terms,
Speaker 1: what sort of services are you providing for this client base?
Speaker 1: It's it's investment management only, just pure What about financial
Speaker 1: planning and taxes and state planning and all that fun stuff? Yeah?
Speaker 1: Are our clients basically get that separately? I mean of course,
Speaker 1: you know when you talk about the cumulation uh, and
Speaker 1: life cycle planning, of course we're we're part of that
Speaker 1: because that's part of the investment process. But no estate
Speaker 1: planning and insurance recommendations. We make very little of those.
Speaker 1: We leave that to other people. And you do not
Speaker 1: accept new clients. You're not out on a promotional tour
Speaker 1: to drum up business. No new clients for for efficient
Speaker 1: fronteer advisors. When did you stop accepting clients? And and why?
Speaker 1: Four years ago? Uh? And you know, I like to
Speaker 1: joke back then that we were both pushing seventy with
Speaker 1: a short stick. Uh. And that stick is now is
Speaker 1: now well broken. Uh. And so it's it's it's we
Speaker 1: really don't feel like taking on new clients at our age.
Speaker 1: That's number one. And number two, it's not fair to
Speaker 1: be taking on a new client. Uh, you know when
Speaker 1: you're when you're both getting the maximum social security benefit.
Speaker 1: You've written about the role of investment advisors and why
Speaker 1: they should be fiduciaries. What do you think is the
Speaker 1: appropriate way they should be compensated? This is like a
Speaker 1: really big debate these days. Yeah, it really, it really
Speaker 1: depends upon the level of expertise of the client. Uh.
Speaker 1: You know, there are some people who are absolutely uh
Speaker 1: fine with, for example, an hourly phase basis. But those
Speaker 1: kinds of people have to be comfortable making their own transactions, right. Uh.
Speaker 1: Once you know you're in the model where you're the
Speaker 1: one who is making the transactions, you've got discretion. I
Speaker 1: don't think that model works anymore. I could be wrong,
Speaker 1: but I just don't think. I just don't think that
Speaker 1: it does. Um. And you know there's the new fee
Speaker 1: model that Jason's Wide wrote about recently. Yeah, just just
Speaker 1: last week, a subscription of a subscription model, which I think,
Speaker 1: I don't know. It sounds to me like a hybrid
Speaker 1: of of the two. So it depends on how much
Speaker 1: hand holding you've got. But it gets to a more
Speaker 1: basic problem in our in our society, which is that
Speaker 1: we live in a world where you're expected to do
Speaker 1: your own retirement, uh saving and planning and investing in.
Speaker 1: The analogy that I use is it's kind of like
Speaker 1: a stuff on the airplane to go to Chicago, and
Speaker 1: you go, you turn right off the jetway to go
Speaker 1: to your seat, and and the flight attendant says, oh no, no, no, no,
Speaker 1: you're turning left, you're flying the airplane. Uh, and everyone's
Speaker 1: become do it yourself? Is not because they want to,
Speaker 1: but it's been mandated. Yeah, and it's a I think
Speaker 1: it's a colossally stupid system. So what's a better system.
Speaker 1: How should we actually have retirement saving and planning set up? Oh?
Speaker 1: I think that there are several systems that that that
Speaker 1: work well, and I'm certainly not an expert on them.
Speaker 1: But the Dutch in the Canadian systems are well funded
Speaker 1: at the national level. Is that funded by individuals or
Speaker 1: by taxpayers or are they the one and the same
Speaker 1: people basically by individuals. The Australian system as well, and
Speaker 1: of course the Australian system, you you have mandated savings
Speaker 1: rates you know that are now going to be well
Speaker 1: north of ten percent. So, in other words, when when
Speaker 1: FICA and everything else comes out of my payroll, ten
Speaker 1: percent gets pulled out and saved for retirement, regardless of
Speaker 1: my desires one way or another, right, exactly, a mandatory,
Speaker 1: a mandatory system. And of course you know that will
Speaker 1: that will make a lot of libertarians happy. But but
Speaker 1: then again, it's not fair for someone who doesn't save
Speaker 1: anything and then expects the state to take care of
Speaker 1: them at age sixty eight old ninety right, exactly exactly,
Speaker 1: so that that's really quite quite a true Again, So
Speaker 1: you're right, the wealthy are different than you and I.
Speaker 1: They have more ways of having their wealth stripped away
Speaker 1: from them. Explain, well, Uh, you know, when you become
Speaker 1: wealthy in our society, it becomes quickly externally apparent, uh,
Speaker 1: if you so choose to flaunt it in that way.
Speaker 1: I think the new generation is less uh, less likely
Speaker 1: to wear flashy watches and drive expensive cars. Yeah, but
Speaker 1: you know, at the end of the day, human beings
Speaker 1: are the are the apes who seek status for sure,
Speaker 1: and and it's it's and the good evolutionary reasons having
Speaker 1: to do why why people do that? And so when
Speaker 1: you become wealthy, you're basically painting a great big bull's
Speaker 1: eye on your chest, uh for the bad actors in
Speaker 1: the business. And the more wealthy you display, uh, the
Speaker 1: more likely you know you are to get hit by
Speaker 1: one of these people. Quite interesting, your historical non fiction
Speaker 1: works are very very different in tone and content than
Speaker 1: the investing in financial books. They appear to be deeply
Speaker 1: deeply researched. Every page is a dance in many ways.
Speaker 1: They they remind me of your namesake, Peter Bernstein, whose
Speaker 1: similar books. UM. Every page is just filled with so
Speaker 1: much information. What made you decide to start writing like this,
Speaker 1: like you are a full time author. Well, uh, when
Speaker 1: you start writing about finance, you realize that the history
Speaker 1: is so very important. We got into that in one
Speaker 1: of the last uh segments. UH. You know, as Santiana
Speaker 1: famously said, if you don't know your history, you're doomed
Speaker 1: to repeat it. Nowhere is that more true than in finance.
Speaker 1: And I discovered that I enjoyed writing writing history. In fact,
Speaker 1: it was the part of the books that I wrote
Speaker 1: that I decided that I liked the most. And so
Speaker 1: after I had written uh two books of finance, The
Speaker 1: intelligenaceid Allocator and The Four Pillars of Investing, I approached
Speaker 1: my um uh then publisher McGraw hill, and I said,
Speaker 1: I would like to write a book about the growth
Speaker 1: inflection that occurred during the early nineteenth century. Before you know,
Speaker 1: about eighteen twenty or so, economic growth UH in most
Speaker 1: nations was very close to zero. And then in the
Speaker 1: leading edge nations, the England, the United States, and most
Speaker 1: of Western Europe growth rose to about two percent per year, which, uh,
Speaker 1: you know, compounded over the centuries, has produced the enormous
Speaker 1: improvement in standard of living that we have. And I
Speaker 1: wanted to know why eighteen twenty, because you know, the
Speaker 1: Industrial Revolution had had started almost a century before that.
Speaker 1: There was something else that was happening, and I wanted
Speaker 1: to write about that. So that was Birth of Plenty,
Speaker 1: which was modestly successful, and it also became a calling
Speaker 1: card as well. For that that got the attention of
Speaker 1: of other publishers, and then that led to explain that
Speaker 1: exchange correct. Yes, and Peter Bernstein gets into that story
Speaker 1: because a couple of years after I had written Birth
Speaker 1: of Plenty, I get this phone call from an acquisitions
Speaker 1: editor at grow Atlantic by the unlikely name of Brando's
Speaker 1: sky Horse. Uh. And that's a phone. That's a message
Speaker 1: you'll take, Yeah, put him through. Yeah. And so he
Speaker 1: he said, you know, we we want you to write
Speaker 1: a book about the history of world trade. And I
Speaker 1: said three things. Number one, I don't know anything about it.
Speaker 1: Number two, I'm not interested in it. And number three,
Speaker 1: you've got the wrong Bernstein. And and there was this
Speaker 1: sort of pregnant pause at the end of the line,
Speaker 1: and he said, well, we actually did have lunch with
Speaker 1: him last week and we offered him the book, and
Speaker 1: he said he was busy, he was busy writing his
Speaker 1: history of the Erie Canal. But Peter said, there's this
Speaker 1: other Bernstein and that's that's how I got to write
Speaker 1: the book. That's very funny, this other Bernstein that that
Speaker 1: really is hilarious. So this obviously how a whole lot
Speaker 1: of work and research that went into it. What's the process, like,
Speaker 1: how long did it take to research this? How long
Speaker 1: did it take to write it? A book like this
Speaker 1: takes about four years to write. Yeah, And and the
Speaker 1: process is, uh, you start by doing, uh, just a
Speaker 1: truckload of reading. Uh. You know when you when you
Speaker 1: write a book like this, you're probably reading about somewhere
Speaker 1: around fifty thousand pages of material. And the analogy I
Speaker 1: like to use is it's kind of like you've got
Speaker 1: a puzzle, this enormous jigsaw puzzle to put together, and
Speaker 1: you're given ten thousand pieces, but you can only pick
Speaker 1: a thousand pieces to make the picture with. Uh. So
Speaker 1: it's a difficult process and it's it's a skill set.
Speaker 1: I guess that not everyone has, but it's something you know,
Speaker 1: is one of these things I discovered I actually knew
Speaker 1: how to do, and it's an enormously enjoyable process I've
Speaker 1: I've you know, this particular book was quite successful. The
Speaker 1: book that I wrote after that was an absolute flop,
Speaker 1: uh on the media. It was on the media, was
Speaker 1: on the history of communications, technology and media. But the
Speaker 1: point was is that I had just as much fun
Speaker 1: writing both, and I feel just as good as I
Speaker 1: about about about both. Is if you don't enjoy the process,
Speaker 1: you should not be writing, to say the least. So
Speaker 1: when you say you read fifty thousand pages quick back
Speaker 1: the envelope, that's a hundred books at five pages each
Speaker 1: or something like that. Yeah, of course you're not reading
Speaker 1: a hundred books. What you're doing is you're climbing the
Speaker 1: bibilio graphic tree. And you might read a few of
Speaker 1: those books all the way through. But what in fact,
Speaker 1: what you're really doing is you're reading lots of books
Speaker 1: sections just maybe a couple of pages or even a
Speaker 1: paragraph or two from each source, and then you're branching
Speaker 1: out into the bibliographic tree, into the reference sources. And
Speaker 1: it's this tree that goes out several branches, and you
Speaker 1: the nice thing about it is, you know when you're
Speaker 1: done when you keep coming back to the same sources
Speaker 1: over and over again, when you reach that point that
Speaker 1: you're being referenced back to the same the same academic articles,
Speaker 1: the same text, the same secondary sources. Uh, you know
Speaker 1: that you're done. Let me throw a few questions that
Speaker 1: you from the book The World's greatest human cataclysm, the
Speaker 1: plague the Black Death was the direct result of long
Speaker 1: established trading patterns. Explain that, Well, it's a it's a
Speaker 1: fascinating thing that epidemiologists like to talk about, which is
Speaker 1: that when you at least his medical historians like to
Speaker 1: talk about, which is that when you look at the
Speaker 1: world around the year one thousand, you you had these
Speaker 1: pools of people, these civilizations, uh and tribal societies that
Speaker 1: never communicated with each other, didn't didn't talk, didn't deal
Speaker 1: with each other, didn't even know that they existed, and
Speaker 1: so they each developed their own gene pools that people
Speaker 1: outside that pool were totally uh vulnerable too. And so
Speaker 1: there is this organism called your ne epestis the plague Bacillus,
Speaker 1: which existed in h ground roads uh or fleas on lease. Yeah. Fleas, yeah,
Speaker 1: fleas on fleas on roads. And the the the animal
Speaker 1: that you know back in that part of the world
Speaker 1: was an animal called the tarabagin uh. And the rat
Speaker 1: was did they didn't they did this. Fleas didn't learn
Speaker 1: to to to jump onto the rats until much later. Uh.
Speaker 1: And and this you know, was was present in East Asia,
Speaker 1: Northeast Asia uh and probably in the Indian subcontinent as
Speaker 1: as well. And then during the twelfth and thirteenth century uh.
Speaker 1: You get a period of time called the PAXs Mongolica,
Speaker 1: when the Mongol tribes conquered territory all the way into
Speaker 1: eastern Europe and in the other cons yes, and and
Speaker 1: so they opened up trade land trade routes uh. And
Speaker 1: of course the fleas hopped a ride on the camels uh.
Speaker 1: And they got to a place called Kafa uh in
Speaker 1: in in Asia Minor or actually in what's now the Ukraine. Uh.
Speaker 1: And and there's this terrible siege of Cafe where the
Speaker 1: Mongols are are besieging Cafe and they throw over the
Speaker 1: catapult over the city walls, these corpses uh biological office exactly.
Speaker 1: And that that infects the Genoese traders who then UH
Speaker 1: basically carried the disease first into I believe the port
Speaker 1: of Messina in thirteen forty six, and then within three
Speaker 1: years a quarter to a third of the population of
Speaker 1: Europe was dead the damage and the rest of the world,
Speaker 1: which much was much worse. Probably it killed as much
Speaker 1: as people in the main ports of Egypt as well
Speaker 1: as in China. And a lot of this has to
Speaker 1: do with the fact that there is no indoor plumbing,
Speaker 1: there is no system of sanitation, and that filth and
Speaker 1: other things are are continue to be spread. Or is
Speaker 1: that a different rent uh? That wasn't. That wasn't the
Speaker 1: mechanism of of the plague. It was more of an
Speaker 1: air air air airborne UH disease. People would develop a
Speaker 1: cough and transmit UH disease disease that way, and it
Speaker 1: was just very very rapidly, very rapidly spreading. Now, the
Speaker 1: thing that's really interesting is that we worry about international
Speaker 1: air travel and how rapidly diseases spread, but we've not
Speaker 1: seen anything nearly as deadly as the plague, or for
Speaker 1: that matter, the the the influenza outbreak that occurred after
Speaker 1: nineteen eighteen. And the reason is the danger is not mixing.
Speaker 1: It's not mixing, that's the danger. So in other words,
Speaker 1: we now have a broader gene pool around the world,
Speaker 1: and we're more capable of finding off. There are less
Speaker 1: new things that are specifically capable of doing damage, for
Speaker 1: a to a different gene sub subgroup. Is that right? Yeah,
Speaker 1: I think we're in a much safer world than we were.
Speaker 1: Uh uh you know, say, you know, say seven or
Speaker 1: eight centuries ago. Um. And and we've also gotten to
Speaker 1: be you know, public health authorities have gotten to be
Speaker 1: really good uh at at disease prevention as well. We
Speaker 1: tend to think of stock and bond markets as a
Speaker 1: relatively recent historical phenomena, but you right, there have been
Speaker 1: credit markets since human civilization first took root in the
Speaker 1: Fertile Crescent, in other words, thousands of years ago. Is
Speaker 1: that right? Well? Sure, And and there's actually a trace
Speaker 1: of interest rates that goes back at least four thousand
Speaker 1: years and perhaps as much as five thousand years. Uh.
Speaker 1: You know, if you're a farmer, uh, a sedentary farmer
Speaker 1: in the in Babylonia or Samaria, Uh, you need credit.
Speaker 1: You need to borrow money. For farm implements and to
Speaker 1: build a house, but most importantly to buy seed corn. Uh.
Speaker 1: And of course you're not borrowing money, you're not even
Speaker 1: borrowing silver. What you're doing is you're borrowing uh seed
Speaker 1: corn from your your neighbor. And that seed corn has
Speaker 1: a cost of capital. So typically in in in in
Speaker 1: very primitive agrarian societies, it's probably around a percent per year.
Speaker 1: So in other words, I bought borrow one bushel of
Speaker 1: of corn or wheat seeds, and in exchange I returned
Speaker 1: to is that is that about right? That's right? Or
Speaker 1: one calf uh? And then a year later, at calving time,
Speaker 1: you've got to return to calves. Quite quite interesting. UM's
Speaker 1: capital and that's considered capital exact in those days. So
Speaker 1: now that's going backwards, let me go forwards. One of
Speaker 1: the things you wrote was trade almost always benefits the
Speaker 1: nation that engages in it, but only when averaged over
Speaker 1: the entire national economy. That will always be a minority
Speaker 1: hurt by evolving trade patterns, and they always call for protection.
Speaker 1: Sounds very similar to what's going on currently with this
Speaker 1: administration and its battle with China and others over trade practices.
Speaker 1: One of the things that is most satisfying about writing
Speaker 1: nonfiction is to come up with historical examples of modern phenomena.
Speaker 1: There are three and four hundred years old and even
Speaker 1: thousands of years old, And there's this wonderful UH story
Speaker 1: of these riots that swept London UH in around the
Speaker 1: year Sevre, having to do with the textile trade UH,
Speaker 1: where weavers stoned UH and attacked parliament, the East India
Speaker 1: Company offices as well as the UH the home of
Speaker 1: the Governor of the East India. It was basically the
Speaker 1: Seattle riots, UH, you know, three hundred, three hundred years ago,
Speaker 1: and the reasons for it were exactly the same. There
Speaker 1: were people who were out of work. So you know,
Speaker 1: clearly we're much better off now because of of trade
Speaker 1: UH you know and cut off trade, increased tariffs. And
Speaker 1: you're gonna find yourself, you know, in the situation of
Speaker 1: the the Iowa soybean farmer who's going to lose his
Speaker 1: farm very shortly because of the Trump UH tariffs. Are
Speaker 1: you going to find yourself as a consumer paying three
Speaker 1: and four times for your shirts and your electronics what
Speaker 1: you're used to, Or of automobile manufacturers whose costs have
Speaker 1: gone up because of metals UH tariffs. So clearly trade
Speaker 1: benefits and entire the entire nation. And you saw that
Speaker 1: in reverse during the nineteen thirties, UH, with the trade
Speaker 1: wars that followed the Holly Smoot UH tariff. But they're
Speaker 1: always losers. Okay, there are textile workers who've lost their jobs.
Speaker 1: There are auto workers and steel workers who have lost
Speaker 1: their jobs. UH. And you have to, you know, the
Speaker 1: key to a successful global economy and a national economy
Speaker 1: is simply to have a system that compensates the losers. UH.
Speaker 1: And to think that, you know, you can cut off
Speaker 1: trade and not compensate the losers, which is what this
Speaker 1: administration wants to do, I think is the height of folly.
Speaker 1: So so, when you say compensate the losers, traditionally that
Speaker 1: has been some sort of job retraining or new education.
Speaker 1: How else can we compensate people whose industries no longer exists.
Speaker 1: If you're a coal miner or if you're a furniture
Speaker 1: manufacturer in the US, these jobs are going away. What
Speaker 1: should we be doing as a nation for the losers
Speaker 1: on that end? Really, the better way to say it
Speaker 1: is the people who are on the losing ends of
Speaker 1: of these international trade deals. Well, those are the first
Speaker 1: two things that you need to do, but you need
Speaker 1: a broader social welfare network. You you know, if you
Speaker 1: lose your job, you shouldn't lose your health insurance. Uh.
Speaker 1: For the only nation in the world that does that exactly. Uh,
Speaker 1: you know, we should increase do things that increase social mobility.
Speaker 1: The United States, in fact, has the lowest social mobility
Speaker 1: of any developed nation. If you are born into the
Speaker 1: bottom quintile UH of of income, the odds of getting
Speaker 1: into the top quintile of income are only six percent
Speaker 1: in the United States. It should be a perfectly egalitarian system. Uh.
Speaker 1: In most developed countries it's about thirteen percent. Now when
Speaker 1: you look inside the United States, it's very interesting. Uh.
Speaker 1: What you discover is that in Silicon Valley, for example,
Speaker 1: if you're born into the bottom quintile, the bottom five,
Speaker 1: you have a European chance of getting to the top
Speaker 1: quintile about thirteen or fourteen percent. But if you're born
Speaker 1: into the bottom quintile in Alabama, you've got a three
Speaker 1: percent chance. What does that tell you? It tells you
Speaker 1: that people in Alabama are not investing enough in their
Speaker 1: young people. And so that's probably the primary thing we
Speaker 1: should be doing at bases. We should be investing far
Speaker 1: more money in education. I find it remarkable that the
Speaker 1: people who rail against the public school system and the
Speaker 1: money that we so supposedly wasted that system, will happily
Speaker 1: spend three and four times that amount every year on
Speaker 1: their to send their kids to private school. Quite quite interesting.
Speaker 1: You discuss how economic ability has has is so low
Speaker 1: in the US. It wasn't always the case. Wasn't there
Speaker 1: much greater economic mobility previously, especially the post War War
Speaker 1: two era. Well, just to give you one small, very anecdotal,
Speaker 1: very small example, my medical school tuition was fifty dollars
Speaker 1: a year. I came out of medical school with almost
Speaker 1: zero debt. Good luck doing that today, right, it's two
Speaker 1: hundred thousand a year. If it's anything, it's it's quite
Speaker 1: quite insane. Um. Let's talk a little bit about Masters
Speaker 1: of the word, how media shaped history from alphabet to
Speaker 1: the internet. So there are a lot of really interesting
Speaker 1: bullet points in this book. You make the case that
Speaker 1: Guttenberg did not change the world with the printing press,
Speaker 1: but in a slightly different way explain it's a fascinating
Speaker 1: bit of of technology. Which is that, of course, he
Speaker 1: didn't invent the printing press that the Chinese and the
Speaker 1: Koreans had it. They even had, the Koreans even had
Speaker 1: moving alf, even had movable alphabetic type. What Gutenberg did
Speaker 1: was to make the production of that type much more efficient.
Speaker 1: If you think about running a printing press or printing
Speaker 1: a book, you're talking about literally owning hundreds of thousands
Speaker 1: of pieces of type. Uh. And if you're casting that
Speaker 1: individually via the pre existing processes, that was something that
Speaker 1: was open only to two governments. That the Chinese government
Speaker 1: was able to do it. Uh. Back then there were
Speaker 1: some Korean printers who could do it, and that was
Speaker 1: about it. Um Guttenberg invented a metal alloy process of
Speaker 1: casting that enabled a skill type caster, my favorite word,
Speaker 1: a type caster who who could produce about three pieces
Speaker 1: per minute of alphabetic type and basically bring it down
Speaker 1: to the artisan level. So what Guttenberg did was in
Speaker 1: invent the printing press. What he did was invent efficient
Speaker 1: the efficient production of movable alphabetic type, which was a
Speaker 1: far more subtle invention. So here's another bullet point from
Speaker 1: from Masters of the Word. You write the Fall of
Speaker 1: the Soviet Union resulted from a colossal error in radio production.
Speaker 1: Explain that, well, the Russians UH produced, mass produced their
Speaker 1: radios uh and in a couple of factories. It was
Speaker 1: very centrally driven, and they made a mistake that the
Speaker 1: Nazis didn't make. The Nazis were smart enough when they
Speaker 1: made their radios uh and the Nazi regime basically came
Speaker 1: into being pretty much at the dawn of popular radio
Speaker 1: in Germany, and they made sure that the radios were
Speaker 1: not tuned well enough to produce foreign broadcasts uh and
Speaker 1: the Soviets didn't do that. The Soviets built radios that
Speaker 1: allowed tens of millions of the citizens to get the
Speaker 1: BBC and Voice of America and deutschewella, uh, it was,
Speaker 1: it was. It was just a colossally the sort of
Speaker 1: colossally stupid thing you would only see an essentially planned economy.
Speaker 1: That's hilarious. So so now, one of the things you
Speaker 1: write about this in the sort of pre social media
Speaker 1: days was that as more people get access to means
Speaker 1: of communication, the result tends to be more democracy. Do
Speaker 1: you still hold those views in the face of how
Speaker 1: much fake news quote unquote um and and the way
Speaker 1: Facebook has been weaponized to influence elections. You do you
Speaker 1: still hold those views or what are your thoughts about
Speaker 1: that change in in social media. I still believe the
Speaker 1: basic precept and the the the analogy that I like
Speaker 1: to use is that in the era of radio and television,
Speaker 1: it was so centrally controlled that getting into a fight
Speaker 1: with the national powers that be, whether it was the
Speaker 1: media or the government or the government controlled media, was
Speaker 1: like bringing a knife to a gunfight. Uh. Now both
Speaker 1: sides have guns. What I really didn't anticipate, and I
Speaker 1: don't think anybody anticipated even five or six years ago,
Speaker 1: is that you've you've enabled the worst players in our society. Uh.
Speaker 1: And and that's the you know, this industrial grade Uh
Speaker 1: that that that's your phrase, By the way, it does feels,
Speaker 1: but it's true. It's not just running the mill BS.
Speaker 1: It's manufactured at a very high level. Yeah. And and
Speaker 1: and of course there's there's this famous moral philosopher, uh
Speaker 1: named Harry Frankfurt who will be known forever after for
Speaker 1: a little sixty eight page essay B S Yes. And
Speaker 1: what is BS BS is is not just things that
Speaker 1: are necessarily false. Sometimes BS can actually be true. But
Speaker 1: it's just words that are spoken that have no reference
Speaker 1: and no intentional reference to the fact the facts, And
Speaker 1: of course you know we've we've now enshrined that. In
Speaker 1: our Commander in Chief. The description I like best is
Speaker 1: we we live now in a post fact era, which
Speaker 1: kind of cracks me up because I don't believe it's
Speaker 1: such a thing as the post fact era. Um, but
Speaker 1: here we are, and uh, can you stick around a bit.
Speaker 1: I have a ton more questions for you. We have
Speaker 1: been speaking with William Bernstein, author of such books as
Speaker 1: a Splendid Exchange and The Four Pillars of Investing. If
Speaker 1: you enjoy this conversation, well come back and check out
Speaker 1: the podcast extras. Will we keep the tape rolling and
Speaker 1: continue discussing all things finance. You can find that at iTunes, Overcast, SoundCloud, Stitcher,
Speaker 1: wherever finer podcasts are sold. We love your comments, feedback
Speaker 1: and suggestions right to us at m IB podcast at
Speaker 1: Bloomberg dot Net. Check out my daily column at Bloomberg
Speaker 1: dot calm slash Opinion. Follow me on Twitter at Rid Halts.
Speaker 1: I'm Barry Ri Halts. You're listening to Master's in Business
Speaker 1: on Bloomberg Radio. Welcome to the podcast. Bill, thank you
Speaker 1: so much for doing this. I um, I've been looking
Speaker 1: forward to having this conversation. You and I have swapped
Speaker 1: emails over the years, and you've had some lovely things
Speaker 1: to say about this format. So I'm thrilled to finally
Speaker 1: get you in here in the booth and have this conversation.
Speaker 1: Can I Can I say a lovely thing or two
Speaker 1: about your format if if you feel inclined? Yeah, I do. Uh.
Speaker 1: You know, there aren't very many people in this world
Speaker 1: that I actually envy, but you're one of them. There
Speaker 1: there are. There are a few things that I enjoy
Speaker 1: more than talking to people have who have interesting things
Speaker 1: to say, and that seems to me to be all
Speaker 1: that you. You do. Whoever you feel like talking to
Speaker 1: you can get on this program. Don't let anyone else know.
Speaker 1: That's secret. Yeah, and I and I and I envy
Speaker 1: the heck out of out of the platform that that
Speaker 1: you have and how you enjoy yourself. I'm gonna let
Speaker 1: you in a little secret. My writing is for no
Speaker 1: audience of one, and this show effectively is for an
Speaker 1: audience of one. I've managed to con everybody into thinking
Speaker 1: that this is supposed to be a broadcast. But essentially
Speaker 1: it's me having a conversation that I want to have. Yeah,
Speaker 1: you get people to answer your emails who never answer
Speaker 1: my emails, and I am green with envy. Well, if
Speaker 1: I can help make an introduction, I would be happy
Speaker 1: to do that. You're not, by the way, You're not
Speaker 1: the only person who said that to me. Some other
Speaker 1: people who I won't say on air, but i'll tell
Speaker 1: you privately, have said that to me. And it's really
Speaker 1: oh really, So people have figured out that this is
Speaker 1: a giant self indulgence and they wish they could do
Speaker 1: See if you are in an Oregon, if you were
Speaker 1: in New York, you can wing something like this together. Um.
Speaker 1: Other people have done this in a way. Mark Maron
Speaker 1: started in his garage and Los Angeles, and since he
Speaker 1: was a stand up comedian for forever, he would con
Speaker 1: his comedian friends to come in and that's blown up
Speaker 1: into this giant thing. So there's something to just engaging
Speaker 1: in a little bit of self indulgence and speaking to
Speaker 1: people you want to speak to. Yeah, one one thing, Barry,
Speaker 1: it's Oregon. You say Oregon to Oregon. You say Oregon
Speaker 1: too many times. That's a band. Actually, there was a
Speaker 1: band called Oregon and I that's where that comes from. Yeah,
Speaker 1: but you do it too many times. We take away
Speaker 1: your visa to come to uh, what's going on in Portland, Oregon.
Speaker 1: It's that that is a city that is now both
Speaker 1: booming and kind of completely out of control, isn't it? Yeah,
Speaker 1: it is. It's It's what happens to any city where
Speaker 1: when it becomes too popular, uh, and the cost of
Speaker 1: of residents, the cost of real estate goes up. Uh
Speaker 1: as you get out of whack. Of course, you know,
Speaker 1: we have you know, the the ultimate example of that
Speaker 1: is San Francisco, which has gotten to be this ludicrously
Speaker 1: bifurcated place that is populated but with this you know,
Speaker 1: bimodally on on. You know, there's this one peak of
Speaker 1: people to the to the right of the curve, who
Speaker 1: who have you know, matth s a t s of
Speaker 1: seven fifty and can talk in differential equations and in finance,
Speaker 1: and who are very well dressed and are spending you know,
Speaker 1: nine dollars on avocado toast for for breakfast. And then
Speaker 1: you've got the other people who are on the cusp
Speaker 1: of homelessness or are homeless speaking of which the West
Speaker 1: Coast has far more homelessness than every time I'm out
Speaker 1: there then I previously remember, and the last time I
Speaker 1: was in Portland, I was shocked at the number of
Speaker 1: people living on the streets. It's quite amazing. Yeah, serious,
Speaker 1: serious problem is one factoid that I've seen repeated, I've
Speaker 1: not verified it, which is that if you take Los
Speaker 1: Angeles out of the analysis, the homeless rate in the
Speaker 1: United States is actually falling. Oh really, so so why
Speaker 1: Los Angeles other than the um weather allows you to
Speaker 1: live out their year rounds? Uh? Probably probably just you know,
Speaker 1: it's like any other complex social phenomena, it's a list
Speaker 1: of factors whether uh, and the very high cost of housing. Uh,
Speaker 1: it's it's geographically dispersed, so it can accommodate a lot
Speaker 1: more homeless people without making people too upset. Just the
Speaker 1: whole whole range and things. Yeah. And the stat I
Speaker 1: saw that so disturbing is north of fifty of homeless
Speaker 1: people are suffering from some mental or emotional disability, and
Speaker 1: because they're homeless, they don't have access to medical care
Speaker 1: or regular prescriptions. Yeah. If you you know, if you
Speaker 1: if you dole out food in a in a homeless shelter,
Speaker 1: which you very quickly find out is there's three populations
Speaker 1: of people. One are substance abusers to our schizophrenics, uh,
Speaker 1: and three and equally large people. A group of people
Speaker 1: are people just like you and me who are working
Speaker 1: their rear ends off h and are extremely conscientious. But
Speaker 1: they got a bad draw, they lost their job, they
Speaker 1: lost their health insurance, they became ill, uh, they went bankrupt,
Speaker 1: and they wound up living in their car. That's quite horrifying.
Speaker 1: And when we talk about lack of a social net,
Speaker 1: that's the group that seems to fall through the cracks.
Speaker 1: Although there are that many schizophrenics who are untreated and
Speaker 1: they all eventually become homeless. Is that is that the
Speaker 1: implication there that's a really good question is is to
Speaker 1: what percentage of of of of schizophrenics become homeless. It's
Speaker 1: a very high percentage of them, really Yeah. I mean
Speaker 1: they're the ones who are most visible, because those are
Speaker 1: the ones who were shouting at the top of their
Speaker 1: lungs as you you know, walk by them on the street.
Speaker 1: So so there's a bunch of questions we did not
Speaker 1: get to during the broadcast portion. And I wanna run
Speaker 1: these by you before we get to our favorite question, Shians.
Speaker 1: Some of these are really quite quite intriguing. Um, let's
Speaker 1: let's start with finance and then work our way through
Speaker 1: some variations. When a quote, I'm going to give you
Speaker 1: a quote of yours. When a famous investor starts publishing
Speaker 1: a newsletter, it's a sure tip off his investing techniques
Speaker 1: have stopped working. Discuss well, that's an elite, but a goodie. Uh.
Speaker 1: You know, if if you or I actually know how
Speaker 1: to reliably beat the market, you're not going to tell
Speaker 1: anybody about it. You're not even gonna tell your own
Speaker 1: mother about it. You are going to leverage yourself to
Speaker 1: the hilt. You're not going to take anybody else's money. Uh,
Speaker 1: that's not that's not you. That you haven't borrowed yourself.
Speaker 1: And then when you're done, you'll go to the beach. Uh.
Speaker 1: You're you're you're you're sure as not. You're sure as
Speaker 1: heck not going to publish a newsletter and sell it
Speaker 1: for two a year. My my favorite part of the
Speaker 1: Jim Simon's Renaissance Technology Lure is after few years of
Speaker 1: the medallion UM their their flagship fun throw off. Annually
Speaker 1: they basically said to investors, listen, there's a finite amount
Speaker 1: of alpha here and there ain't enough for you and me,
Speaker 1: so you gotta go. And they returned all of the
Speaker 1: outside money, and now the medallion fund has been Renaissance
Speaker 1: Technology employees and Jim Simmons. That's basically at a year
Speaker 1: for forty years something like that. It's a it's a crazy,
Speaker 1: crazy number. Um speaking of crazy numbers, I don't remember
Speaker 1: which book this is from, but this really um blew
Speaker 1: my mind. An old Master painting bought from the artist
Speaker 1: for a hundred dollars and sold three hundred and fifty
Speaker 1: years later for tens of millions of dollars. Returns but
Speaker 1: three point three percent annually. Explain that, Well, it's it's
Speaker 1: it's you know, it's called the magic of compounding. Uh.
Speaker 1: You know, if you if you save and you have
Speaker 1: a decent rate of return, even a modest rate of
Speaker 1: return over hundreds of years, then you know you'll have
Speaker 1: a fabulous amount of money. But of course you can't
Speaker 1: do that because you're gonna want to spend some of
Speaker 1: the money. Let alone, let it ride for three or
Speaker 1: four generations. Now, Ben Franklin did that, Uh, well, Ben
Speaker 1: Franklin set up an investment portfolio, and I have to
Speaker 1: admit I'm not aware of details of it, but it
Speaker 1: was a portfolio that was designed to last some very
Speaker 1: long period of time and benefit his charitable causes. And
Speaker 1: it actually did earn a decent rate of return over
Speaker 1: a period of more than the century and wound up
Speaker 1: being worth a lot of of money. But what you know,
Speaker 1: what I like to say about that is that yes,
Speaker 1: if you, if you, if you put you know, a
Speaker 1: hundred dollars into stocks and then save it for for
Speaker 1: for seventy years and invested for seventy years, you're gonna
Speaker 1: have a fabulous amount of money. But myself, I'd rather
Speaker 1: be twenty years old with a few with a few
Speaker 1: euros in my pocket on the boulevards of Paris, uh
Speaker 1: than be ninety years old with with millions of dollars.
Speaker 1: Thank you so much for saying that. I get the
Speaker 1: fire group of of people who think you should live
Speaker 1: like a pauper, pour every penny you have into the
Speaker 1: stock market for ten or fifteen years and then retired
Speaker 1: at age forty, and it just seems so wrong to
Speaker 1: me to to not enjoy life in your twenties and thirties.
Speaker 1: Who wants to live like that if you can avoid it.
Speaker 1: I tend to be you know, I tend to be
Speaker 1: fairly sympathetic to the fired group. But it's it's a
Speaker 1: suspicious Uh, it's a suspicious group of people. A lot
Speaker 1: of these people were people who were making six figure
Speaker 1: incomes in the industry and then got to retire at
Speaker 1: age thirty three or thirty five with a giant pile
Speaker 1: of stock options to right, exactly, and and if that
Speaker 1: works really well as long as you don't have children
Speaker 1: or get sick, right, that's right. But there is some
Speaker 1: thing to be said for being able to enjoy and
Speaker 1: appreciate the work you do and have finding some some
Speaker 1: meaning and some value in your hourly labors and not
Speaker 1: just split wood and round up in water the horses
Speaker 1: and live the life of a hermit or or so
Speaker 1: it seems moderation in all things. That makes that makes
Speaker 1: perfect sense. Um, So there's two others that were that
Speaker 1: really stood out. UM. I have a pet thesis I'll
Speaker 1: share with you in a moment, But you wrote, at
Speaker 1: a very early stage in history, we are encountering survivorship bias.
Speaker 1: The fact that only the best results tend to show
Speaker 1: up in history books. Explain, well, there's a classic example
Speaker 1: of that from World War Two uh Ari Woldman and
Speaker 1: the planes coming Back. Yeah. Yeah, So it's you know,
Speaker 1: just for the readers who listeners who haven't heard us
Speaker 1: when you when they when they analyzed the bombers that
Speaker 1: came back from World War Two and they looked at
Speaker 1: the patterns of of the of the Shropnell uh bullets. Yeah,
Speaker 1: they found that there was there were areas that that
Speaker 1: didn't ever seem to get hit. And of course the
Speaker 1: reason why they never get his when he got hit
Speaker 1: in the fuel tank, you didn't come back, or the engine.
Speaker 1: If it hit the engine, you're not going to make
Speaker 1: the flight back. It's the same thing in in finance. Uh.
Speaker 1: You know, you you see the people who did well.
Speaker 1: You the thing that sticks in your mind is the
Speaker 1: guy who bought Amazon or Microsoft on the I p O.
Speaker 1: But what you don't see are the other of IPO
Speaker 1: investors who who did uh? Who? Who who had their
Speaker 1: heads hand into them? So there was um I call
Speaker 1: this the the loss and found stock certificate. There was
Speaker 1: a story in the papers. Uh, it's got to be
Speaker 1: a decade ago, Uncle Fred buys some E M C
Speaker 1: and he gets the certificates, and it goes into a
Speaker 1: firebox and it gets stuck somewhere in the attic, and
Speaker 1: nobody looks at it for twenty five years, and then
Speaker 1: they find the stock certificates and wow, it's worth six
Speaker 1: million dollars and it makes the paper and it's fascinating.
Speaker 1: But the reason that's so misleading is if you would
Speaker 1: have bought GM, and and then GM subsequently declares bankruptcy
Speaker 1: or fill in the blank, Lehman Brothers or pets dot
Speaker 1: Com or whatever when he finds those stock certificates, Nobody
Speaker 1: tells the newspaper. Nobody writes the story. You don't hear
Speaker 1: about it. You only hear about the odd ones that, wow,
Speaker 1: a fortune was created. And that's pure survivorship bias. Yeah,
Speaker 1: and it's the same thing, you know, to a to
Speaker 1: a more subtle degree, but but a more important degree.
Speaker 1: Probably with with mutual funds. Uh. You know, there are
Speaker 1: there are There are mutual funds that have done very well,
Speaker 1: uh and have good long term records, have beaten the market.
Speaker 1: But you know, for every one of them, there are
Speaker 1: probably twenty or thirty that got euthanized by the fun
Speaker 1: family because so poorly, and you don't even see those
Speaker 1: in the record unless you have the right the right database,
Speaker 1: So that gets pulled out of the data, and it
Speaker 1: makes the surviving fund average look much better than it
Speaker 1: should be. Yeah, and and it's a it's a much
Speaker 1: even bigger problem with hedge funds and private equity. About
Speaker 1: of hedge funds disappear each year because of that high
Speaker 1: water mark, right it's two and twenty being the net
Speaker 1: gains above a previous high. So if you suffer a
Speaker 1: draw down, you're not gonna get that big fat so
Speaker 1: you're up and over. So they dissolve and start over,
Speaker 1: and it makes the numbers look much better than we
Speaker 1: should be. So my my pet thesis on survivorship bias
Speaker 1: is that everybody's conception of the world is completely wrong.
Speaker 1: Everything we see is survivorship bias. When you look at
Speaker 1: a pen, or when you go to a restaurant you like,
Speaker 1: which perhaps is the best example. How hard can running
Speaker 1: a restaurant being You get a good chef, you get
Speaker 1: a friendly hostess, uh, you get a little media buzz.
Speaker 1: You don't see the other For each successful restaurant. You're
Speaker 1: not seeing the other hundred that have come and gone
Speaker 1: after six months at great expense and anguish. And there's
Speaker 1: a reason it's a terrible investment. There's a reason films
Speaker 1: and plays are a terrible investment. Most plays are in Hamilton's.
Speaker 1: So everything is survivorship bias. And you know you're talking
Speaker 1: about how doctors are such awful investors. I mean doctors
Speaker 1: are certainly not the only occupational category that's that's susceptible
Speaker 1: to that. I mean, entertainers and sports figures in particular, uh,
Speaker 1: regularly lose their their shirts on restaurants. When you look
Speaker 1: at the bankruptcy statistics for specially NFL and NBA players,
Speaker 1: very very high, it's it's a shocking, shocking number. Um.
Speaker 1: And then you know, the one other book we didn't
Speaker 1: talk about, um, was the E book, the Deep Risk Book.
Speaker 1: Was that an e book or a print book? Well,
Speaker 1: I've produced four e books, actually five e books. One
Speaker 1: of them I giveaway for free, That's If you Can,
Speaker 1: And it's actually probably the most widely distributed of my
Speaker 1: IF which is a book for millennials. UH, And it's
Speaker 1: been hundreds of thousands of downloads because it's free. Uh
Speaker 1: it was, you know it was. It was an elamassinary
Speaker 1: project named millennials who didn't have assets. And then I
Speaker 1: have three short booklets, uh Deep Risk in the Ages
Speaker 1: of the Investor, in Skating where the puck Was, and
Speaker 1: I sort of combined that and a bunch of other
Speaker 1: things into a newer version of intelligenaceid Allocator called Rational
Speaker 1: Expectations Um, which was published four or five years ago.
Speaker 1: So that's probably a book that's superseded the intelligenaceid Allocator.
Speaker 1: It's basically meant for the same uh math geeky kind
Speaker 1: of audience. And you've called this investing for adults something
Speaker 1: like that. That's the those five those five series or
Speaker 1: those five books I sort of fold into what I
Speaker 1: call my invest Investing for Adults series, which is you know,
Speaker 1: it's for it's it's for investing adults people who basically understand, uh,
Speaker 1: market efficiency and who understand the relationship between risk and
Speaker 1: return and know that there is no returns ferry and
Speaker 1: no stock picking ferry and uh no market timing. Sorry,
Speaker 1: So when you say adults, you are not using that chronologically.
Speaker 1: You using it in terms of being a sophisticated investor,
Speaker 1: or at least an informed investor. Yeah, I've I've met
Speaker 1: fifteen year old investing adults, and I've met seventy five
Speaker 1: year old investing infants. I swear to God this is true.
Speaker 1: I used to get these emails all the time, especially
Speaker 1: when I was doing a lot of television, and the
Speaker 1: email went something like this, I just inherited a million dollars.
Speaker 1: What I'm going to or a substantial sum of money.
Speaker 1: I'm going to give a hundred thousand dollars to five
Speaker 1: uh different fund managers and whoever generates the best returns.
Speaker 1: I'm going to give my real money too. And it's like,
Speaker 1: why are you incentivizing people to take risks and hope
Speaker 1: they get lucky. You're you're not incentivizing anybody to manage
Speaker 1: your real money appropriately. They don't understand that. It's a
Speaker 1: it's bad game theory or the other one. I'm looking
Speaker 1: for double the market performance but with half the risk.
Speaker 1: I like that one. Also, that's an email used to
Speaker 1: get all the time. Well, as soon as you find that,
Speaker 1: let me know, I have a billion dollars for you.
Speaker 1: But short of that, you're that's that's not really Uh,
Speaker 1: that's not really going to happen. Um. Since you're not
Speaker 1: taking money from people anymore, how does that change how
Speaker 1: you interact with the public through your site. Is it
Speaker 1: a different relationship? Do you get sort of crazy emails
Speaker 1: like that? What? What is? What's what do you see
Speaker 1: flowing to you from that efficient frontier site? Well, I
Speaker 1: intentionally make my email address opaque. If it's there, you
Speaker 1: can hunt it down. You can hunt it down. Uh,
Speaker 1: And it basically makes you feel bad if you email me.
Speaker 1: It's it's one. It's one that's for press only, and
Speaker 1: that basically scares away of people who want to to
Speaker 1: run me down. The people who want to run me
Speaker 1: down and who actually go for that email are people
Speaker 1: simply who've who have read my books. They don't want information,
Speaker 1: They just want to thank me. Really, And that's that's yeah,
Speaker 1: that's the that is. You know, once a week I
Speaker 1: get an email from someone that says, you know, you
Speaker 1: saved my life, Thanks so much. That's delightful. Yeah, And
Speaker 1: it's it's you know, it's it's it's better than the royalties. Yes,
Speaker 1: I would certainly say so. Um. Before we get to
Speaker 1: our favorite questions, I had one last question to ask you,
Speaker 1: and that's the biggest distraction. What is the biggest distraction
Speaker 1: investors run into. Oh, well, it's just the entertainment aspect
Speaker 1: of of investing. It's the it's the c NBC uh
Speaker 1: market environment. Uh, the idea that that what's going to
Speaker 1: you know, where the market's going next year, or what
Speaker 1: company is producing the best product, or what country has
Speaker 1: the hottest economy. Uh, it's it's uh what Jane Bryant
Speaker 1: Quinn called a financial pornographer. So here's the quote of
Speaker 1: yours relevant to that of what you read about investing
Speaker 1: in magazines and newspapers, and a hundred percent of what
Speaker 1: you can run television is worse than useless. Are you
Speaker 1: overstanding that or is that pretty much a decent set
Speaker 1: of figures. Oh? I mean, if you really ask them,
Speaker 1: I'll tell you what I really think. But yeah, I mean,
Speaker 1: I mean that's true. The way I like to put
Speaker 1: it as at CNBC, at Base wants to make you
Speaker 1: poor and stupid. So that's a different website, the conspiracy
Speaker 1: to make you poor and stupid. I used to jokingly say, um,
Speaker 1: you know, you don't walk into a doctor's office and
Speaker 1: have General Hospital playing on the television. If you did,
Speaker 1: you would run screaming from the room. And my pet
Speaker 1: theory is each of the financial channels reflects their parent company.
Speaker 1: So Bloomberg is a data services company, Bloomberg Television is
Speaker 1: all about charts and data and graphics. NBC is an
Speaker 1: entertainment company, so CNBC becomes all about entertainment. And then
Speaker 1: Fox Business is is their parent company is Fox News,
Speaker 1: so it's all about politics and tribalism and partisan warfare.
Speaker 1: And each of the financial channels just reflects what the
Speaker 1: ethos of the parent company is. God, I thought Fox
Speaker 1: Business was about anchors and short skirts. No, No, that's
Speaker 1: generally across the whole line is that when you look
Speaker 1: at some channels more than others, um sex cells, and
Speaker 1: especially when you're marketing to a primarily male audience. I
Speaker 1: don't know if it's still a primarily male audience, but
Speaker 1: that sort of nineties thing, the pre me too era,
Speaker 1: that doesn't seem to have changed very much in the
Speaker 1: past couple of years. It's not not environments. Um the
Speaker 1: words you don't read anymore is leggy, blonde, anchor people.
Speaker 1: But pretty much that's mostly what it continues to be. Right,
Speaker 1: I'm I'm I've read descriptions like that in magazines and
Speaker 1: it's pretty straightforward. I mean, if I can get all
Speaker 1: monkey on you. You know, you asked about the return
Speaker 1: on art, and the reason why the return on artists
Speaker 1: so low is because it has an entertainment segment part
Speaker 1: of the return as well. And this is work that
Speaker 1: you know, Bill Baumble uh and why you very famously
Speaker 1: did which a U M. Hell yeah uh, in which
Speaker 1: he looked, you know, he actually has a return series
Speaker 1: of of art going back centuries and found that on
Speaker 1: average it's got a lower return than stocks and bonds
Speaker 1: because part of its return is is an entertainment return.
Speaker 1: So if you want entertainment from investing, you are going
Speaker 1: going to pay for it. You're gonna get a lower
Speaker 1: return courtesy of the entertainment. Exactly the investment you want
Speaker 1: is the one with zero investment excuse me, zero entertainment return,
Speaker 1: which leaves more room for the investment return. Right. So
Speaker 1: it's it's I always advise people who can't pull the
Speaker 1: needle out of their arm, set up a fun account
Speaker 1: of five, keep it in a different custodian from your
Speaker 1: real money, and if it works out, great, and if
Speaker 1: it doesn't. Thank goodness, it was only five percent, and
Speaker 1: it's sort of like a little bit of insurance, so
Speaker 1: people aren't day trading their retirement. But that's basically what happened,
Speaker 1: the same advice that I give. Really really that's quite
Speaker 1: that's that's quite interesting. It makes me feel good that
Speaker 1: that's the that's the right approach. So let's go to
Speaker 1: our favorite questions. We asked these of all our guests,
Speaker 1: starting with what was the first car you ever owned?
Speaker 1: Your make and model. It was a nineteen seventy two
Speaker 1: blue eight B baby blue Fiat eight fifty Spider purchased
Speaker 1: at the factory in Milan for eight hundred eight uh,
Speaker 1: and it needed to be tuned every three thousand miles.
Speaker 1: It was both tuned, not oil changed, but full tuned. Yes,
Speaker 1: every three thousand miles and mixed it again, Tony, Yeah, exactly.
Speaker 1: And uh. You also have another question about what's one
Speaker 1: of the one of the biggest mistakes you've made and
Speaker 1: and when did you learn from them? And it was both.
Speaker 1: It was both an enormous joy and you know, ever
Speaker 1: since then, I've owned Japanese cars. That that makes the
Speaker 1: pro sense. You know, you talk about art every now
Speaker 1: and then I'll see a column somewhere about if only
Speaker 1: you had bought the Ferrari to fifty, it's worth ten
Speaker 1: million dollars today, initially cost five thousand. Here's the return.
Speaker 1: It's like, well, what about all the other cars that
Speaker 1: came out that year that you could have bought and didn't.
Speaker 1: It's just a pure exercise and survivorship biased. Yeah, and
Speaker 1: if you will not you will almost you can. You
Speaker 1: can't find a Fiat eight fifty Spider now almost for
Speaker 1: love or money. You can, but they don't cost very much.
Speaker 1: They're very hard to find because none of them ever
Speaker 1: lasted that log that's right. So what's the most important
Speaker 1: thing that people don't know about you? That was? That
Speaker 1: was a tough one. But what I came up with
Speaker 1: is that only the people who know me the very
Speaker 1: best understand how easily bored I am. I'm the kind
Speaker 1: of person who likes being on the steep part of
Speaker 1: the learning curve. So most people, most people in medicine,
Speaker 1: fine neurology fascinating and I did too for about, you know,
Speaker 1: ten relatively short years, and then I got bored with it.
Speaker 1: And it's the same thing with you know, all the
Speaker 1: other things I've done with my life is you know,
Speaker 1: I've written a history about world economic growth, I've studied finance,
Speaker 1: I've written about world trade. Now I'm writing about human rationality.
Speaker 1: Uh and and you know, I just enjoy reading new things.
Speaker 1: For me, what I like, What I like to say
Speaker 1: is that is that writing is just a way of
Speaker 1: organizing my reading properly in an interesting manner. And it's
Speaker 1: a good it's a it's a fun way of staying
Speaker 1: on that steep part of the learning curve. So it's
Speaker 1: we always be learning new things. So you you're gonna
Speaker 1: be writing on human rationality. You obviously use behavioral economics
Speaker 1: in a lot of the work you do in finance. Um,
Speaker 1: and you are a neurologist. There's a subsection of behavioral
Speaker 1: economics that some people have called neurofinance, where you're really
Speaker 1: looking at what's going on within the brain within them
Speaker 1: and the current system. Is that right? You're talking about
Speaker 1: a lot of the work that gets done with functional
Speaker 1: imaging technically functional m R. I and I think it's overdone.
Speaker 1: It's become way fashionable, you know, as important as the
Speaker 1: econom and for ski work is, I think it has
Speaker 1: it's relevance to finance, although it's great, is not as
Speaker 1: great as as an area that I think is relatively ignored,
Speaker 1: and that's evolutionary psychology. Uh. We behave in certain very
Speaker 1: irrational ways, and it's nice to be able to identify
Speaker 1: the ways in which we're irrational, which is what Condomen
Speaker 1: and Versky are justifiably famous for. But if you just
Speaker 1: read Condomen into Versky, you don't understand what is in
Speaker 1: back of that behavior. To give you a small example, UM,
Speaker 1: you know, the fundamental characteristic that we have we've already
Speaker 1: mentioned is that humans imitator and finance. We say that
Speaker 1: humans heard. Why do humans heard? Well, if you think
Speaker 1: about it, the easiest way to think about that is
Speaker 1: to think about the history of our species in the
Speaker 1: Western hemisphere over the past depends upon what archaeological record
Speaker 1: you believe. Between fifteen and fifty thousand years uh and
Speaker 1: over a period of a very few thousands of years,
Speaker 1: maybe three or five thousand years, humans spread from the
Speaker 1: high sub Arctic uh in Alaska and the Yukon all
Speaker 1: the way down to the southern tip of South America,
Speaker 1: which has a not very dissimilar climate, and on the
Speaker 1: way they had to learn how to make kayaks. Uh.
Speaker 1: They had to learn how to make poison darts. Uh.
Speaker 1: They blowguns, they had to learn how to hunt bison
Speaker 1: on the great planes. Uh. And you can't learn how
Speaker 1: to do any of those things on your own. If
Speaker 1: each individual person had to learn how to do all
Speaker 1: of those things on their own, they'd have very quickly
Speaker 1: become lunch for for a predator. Uh. And so you
Speaker 1: find the one person who learns how to build the kayak,
Speaker 1: make the blowgun, hunt bison, and then you imitate what
Speaker 1: that person does. So we are the species that imitates.
Speaker 1: We are the ape who imitates. And once you understand that, uh,
Speaker 1: a lot of economic activity and particularly behavior and finance
Speaker 1: becomes a lot more understandable. So am I grossly oversimplifying
Speaker 1: this because I've looked at the same thing from an
Speaker 1: evolutionary standpoint, and I he's thought, Hey, primates are a um,
Speaker 1: They're a herd creature, they're a I don't know what
Speaker 1: it's called for, monkeys, a a tribe, a troop of monkeys,
Speaker 1: or or whoever, of chimps. And that the reason we
Speaker 1: care about social um status is that we want to
Speaker 1: be part of the group. If you're not part of
Speaker 1: the group, you can't survive on your own, and so
Speaker 1: only those creatures that can herd play well with others
Speaker 1: that can be part of the group end up being
Speaker 1: self selected to pass their genes on. If you're a contrarian,
Speaker 1: if you're an outlier, if you're a chimpanzee that isn't
Speaker 1: really going to be core to that social group. You're
Speaker 1: probably not going to get a mate, You're not going
Speaker 1: to pass those genes along. Am am I oversimplifying or
Speaker 1: bastardizing that, or is that just further back in our
Speaker 1: our conversation. Then, Um, that's three million, not thirty thousand
Speaker 1: years ago. Yeah, you you well that that's that that
Speaker 1: goes way back. And as you say, it's it's billions
Speaker 1: and millions of years ago. We seek status because it
Speaker 1: enables us to better, to make babies better, particularly if
Speaker 1: you're if you're a male, and particularly if you're a
Speaker 1: male bull you know bull elephant seal for example. But
Speaker 1: you know human beings have that have have that same
Speaker 1: basic mechanism operating. That is why we seek status. It's
Speaker 1: just a way of forwarding our our d n a
Speaker 1: uh And why use Scott Galloway talks about watches and
Speaker 1: he goes, everybody has a phone that's far more accurate
Speaker 1: than an expensive time piece. But it's a way to
Speaker 1: signal that I can afford to UM take care of
Speaker 1: you and your offspring, and therefore these have not yet
Speaker 1: gone away. It's the it's the broken bag, exactly, and
Speaker 1: it just shows UM ability to take care of the
Speaker 1: next generation. Well yeah, yeah, exactly. It shows that it
Speaker 1: shows that you're able to muster resources. This is signaling
Speaker 1: a signaling mechanism exactly. So so who are some of
Speaker 1: your early mentors who affected the way you practice medicine
Speaker 1: and then who affected the way you practiced finance. Well, uh,
Speaker 1: it's really difficult to point out, uh who, you know,
Speaker 1: It's something at some point I decided I love neurology, uh,
Speaker 1: And I guess there were some uh junior and chief
Speaker 1: residents who I glombed onto in my when I was
Speaker 1: in medical school, and I enjoyed the way they approached patients,
Speaker 1: and I enjoyed the the craft of neurology. Uh. You know,
Speaker 1: and I can think of a couple of names that
Speaker 1: no one will recognize, but they were basically my Now
Speaker 1: when you're a medical student, a junior and a senior
Speaker 1: resident in a subspecially field as a god. Uh. And
Speaker 1: and and so those are the people you tend to
Speaker 1: imprint upon. Uh. And then there was you know, several
Speaker 1: different you know, several different groups of people. The one
Speaker 1: person who certainly had mentored to me was my wife,
Speaker 1: who was an English major, and she knew how to write,
Speaker 1: and and she taught me how to to to write. Uh.
Speaker 1: Did she edit your early work? She edits my early work,
Speaker 1: in my middle work, in my late work. She just
Speaker 1: I will not send anything to a publisher without having
Speaker 1: her look at it. Uh. And you know she's she's
Speaker 1: that good. Uh. And then as far as you know,
Speaker 1: finance goes and finance writing. Uh. There was a person
Speaker 1: I've already spoken about, Frank Armstrong, who encouraged me. Another
Speaker 1: person with Scott Burns, who was a writer for the
Speaker 1: Dallas Morning News who was still rites and still also
Speaker 1: manages money, who told me very forthrightly that I had
Speaker 1: what it took to be a financial writer, that I
Speaker 1: was good with numbers, and I could write pleasing prose.
Speaker 1: And he he said that that I should pursue that.
Speaker 1: And then to other people who helped me greatly along
Speaker 1: the way were John raycenthal Or, whose chief of research
Speaker 1: at Morning Star, and Jonathan Clements of the Wall Street Journal,
Speaker 1: who very early on took uh an interest in me.
Speaker 1: And then there are the people who you know, I
Speaker 1: had only a very glancing knowledge of or almost no
Speaker 1: knowledge of it all. But who's writing affective me? And
Speaker 1: of course that's the holy trinity of of Bogel, uh
Speaker 1: and Malkiol Uh and Fama. If we if we're gonna
Speaker 1: do a mountain rushmore, all three have to go up.
Speaker 1: And I got to know Jack Bogel a little bit personally,
Speaker 1: not very well, uh, and then the other two I well,
Speaker 1: and then and then Gene Fama I do not don't
Speaker 1: really know at all. And I've become friends too with
Speaker 1: with John Ray canthall at all. He's enormously helped. It
Speaker 1: wasn't honest to help to me. I've been trying to
Speaker 1: get Fama in here for a long time. So if
Speaker 1: you ever do happen uh the befriend him, send him
Speaker 1: my way. He's I've had the other half of that
Speaker 1: Nobel Prize. I've had children here. But Fama remains elusive
Speaker 1: and is only rarely glimpsed in the wild. He does
Speaker 1: not have much of a public uh face. So you
Speaker 1: mentioned the writers that influenced, influenced you tell us about
Speaker 1: some of your favorite books, fiction, nonfiction, financial related whatever. Well,
Speaker 1: fiction wise, I don't read that much fiction. But there
Speaker 1: are two people who are or popular writing I should
Speaker 1: say that I read compulsively. And one of them is
Speaker 1: gen Lacaray, and the other is Michael Lewis. You know
Speaker 1: how often nonfiction Michael Lewis is nonfiction. He's nonfiction, of course,
Speaker 1: and and how often you know both you and I
Speaker 1: had the experience of reading an article somewhere in New
Speaker 1: York or Atlantic wherever, and you say, god, this is
Speaker 1: this is really good. I wonder who wrote this because
Speaker 1: you didn't really pay attention to who wrote it. And
Speaker 1: you go back and you slap your forehead, and of
Speaker 1: course it was Michael Lewis. So I'm gonna I'm gonna
Speaker 1: take it a step further. I always know who I'm reading.
Speaker 1: I I no longer read mastheads. I don't read the
Speaker 1: New York Times of the Wall Street Journal or The
Speaker 1: Atlantic or whatever. I read different authors. This is part
Speaker 1: of my reading evolution. And so I will read everything
Speaker 1: that Dan Gross or Michael Lewis or Jesse Eisinger or
Speaker 1: go down the list. Um, so I'd have a tendency
Speaker 1: to read I And I recall the last time I've
Speaker 1: experienced who wrote this. Oh, of course it's I I personally,
Speaker 1: but I spent a lot of time on the internet,
Speaker 1: and it's a fire hose. So to make that manageable,
Speaker 1: I try. There are people who whatever they put out,
Speaker 1: and certainly Michael Lewis is one of them. Whatever they
Speaker 1: put out, I just have to read it. Yeah. And
Speaker 1: then and then there are the three you know, the
Speaker 1: three great books that I recommend to everybody. Uh. Number
Speaker 1: number one is Expert Political Judgment by philth Tetle. Sure. Uh,
Speaker 1: you know about how what lousy forecasters we are, what
Speaker 1: mistakes we make, and you know his section on on
Speaker 1: the on the on the nexus between the media and
Speaker 1: pundits is required reading, sure for everybody. Uh. There is
Speaker 1: a book called The Moral Animal by Man Running of
Speaker 1: Robert Right, which gets to the heart of the origins
Speaker 1: of religion and morality and of human behavior. It's it's
Speaker 1: a book basically about evolutionary psychology. It's like Tetlock. It's
Speaker 1: a very dense book. And then finally there's a book
Speaker 1: which is easy, well, it's both easier and more painful
Speaker 1: to read, which is a book by a British documentarian
Speaker 1: called Lawrence Re's r e s called al Schwitz a
Speaker 1: New History, and it is about the camp personnel who
Speaker 1: worked at al Schwitz and how they did what they did,
Speaker 1: why they did it, and it basically explains to you
Speaker 1: Arrant's uh famous banality of evil. The Germans were not exceptional.
Speaker 1: They were not an exceptional people. Uh, they were just
Speaker 1: uh convinced by everybody. The Jews were vermin? What do
Speaker 1: you do to vermin? Uh? And what I tell everybody
Speaker 1: that I that I meet uh these days is that
Speaker 1: it's a very sure throw from vermin to rapists and murderers. Absolutely,
Speaker 1: it's it's I think that one of the things that
Speaker 1: have been revealed by the gas lighting we've seen over
Speaker 1: the past few years is that it's not hard to
Speaker 1: fool a huge swath of the population into doing unthinkable things.
Speaker 1: It's it's shockingly easy. Yeah, any any people, any people
Speaker 1: can do it. Uh. Any you know. One of the
Speaker 1: one of the most shocking things, most things will stick
Speaker 1: in your memory from from the reads book is that
Speaker 1: British officials in the Channel Island which we're taken over
Speaker 1: by the Germans, uh, gladly handed over Jews to the Nazis,
Speaker 1: the Brits during Brits during worldwide astonishing. Yeah, and it's
Speaker 1: also very useful when you're thinking about financial fraud and
Speaker 1: financial malthesis. If you understand Auschwitz, it's very easy to
Speaker 1: understand what happened in en Royn. Everybody brought into the
Speaker 1: whole company thing and despite obvious in this year fraud,
Speaker 1: they managed to overlook it. Um. I know you mentioned
Speaker 1: the FIAT was a failure, but let's talk more professionally.
Speaker 1: Tell us a power the time you failed and what
Speaker 1: you learned from the experience. Well, you know the last
Speaker 1: two nonfiction books that have been published and sold, where
Speaker 1: one was a splendid Exchange which succeeded beyond my wildest
Speaker 1: expectations in terms of reviews, sales, the speaking gigs. It
Speaker 1: continues to get me. Uh, it was wildly successful. And
Speaker 1: then the book that came after that, Masters of the Word,
Speaker 1: which we talked briefly about it was an absolute flop.
Speaker 1: I doubt it's sold five thousand copies. Really yeah? Uh?
Speaker 1: And and what that taught me is just how capricious
Speaker 1: publishing is. Are you equally satisfied with the final product?
Speaker 1: That's the whole point is is I had just as
Speaker 1: much fun writing both of them. I'm just as proud
Speaker 1: of of both of them. And and what it taught
Speaker 1: me is that you can spend three or four year
Speaker 1: is writing a book and it can disappear almost without
Speaker 1: a trace. Uh. And that doesn't mean that the exercise
Speaker 1: wasn't worthwhile, because hopefully you're writing books for other reasons.
Speaker 1: What do you do for fun? What do you do
Speaker 1: when you're not writing books or researching in the library? Well, um,
Speaker 1: you know, uh, I lead I'm afraid of very ordinary life.
Speaker 1: I'm your base acceptationtioneering and who enjoys his children and
Speaker 1: his grandchildren and traveling. Uh while I I still can uh.
Speaker 1: I I enjoy living in Portland, Oregon more than I
Speaker 1: can imagine. You can imagine. I live in a place
Speaker 1: where I can walk downtown and be there in fifteen minutes,
Speaker 1: or I can walk twenty minutes uphill and be in
Speaker 1: a Sequoia grove. Uh. And you know have have have
Speaker 1: first class Cuiscans and uh and begets right out in
Speaker 1: my front door. The food in Portland is outstanding. I
Speaker 1: don't know if people realize that that should be on
Speaker 1: the foodie city. So it's every time I'm there, I
Speaker 1: come away that was it was really amazing restaurants. We
Speaker 1: have an office in Portland. It's really astonishing the food there. Yeah.
Speaker 1: So I love that. And of course, you know, the
Speaker 1: things that that I that I really enjoy doing are
Speaker 1: are the research, the the the process of putting a
Speaker 1: book together. It is just great fun under uncovering these
Speaker 1: stories it almost no one knows about. So, so what's
Speaker 1: the next book that's going to be coming from you?
Speaker 1: The next book will be a modern remake, if you will,
Speaker 1: of Charles McKay's famous Extraordinary Popular Delusions in the Madness
Speaker 1: of Crowds or actually Memoirs of Extraordinary Popular Delusions in
Speaker 1: the Madness of Crowds. Uh. Let's got to be so
Speaker 1: much fun to dive into. Oh yeah, and it's a
Speaker 1: book basically that covers finance, of course, the three Great
Speaker 1: bubbles of the seventeenth and eighteenth centuries, as well as
Speaker 1: all out of religious manias. Uh. And so that's what
Speaker 1: this book is, it's it combines three things. Is financial
Speaker 1: mania's religious manias, and then the neuropsychology and particularly the
Speaker 1: evolutionary psychology that glues all of them together. But one
Speaker 1: of the things that I learned from my colleague Ben Carlson,
Speaker 1: who I know, you know, was that the Japanese um
Speaker 1: bubble that popped in nine made the Nasdaq bubble in
Speaker 1: two thousand look like child's play. It was like five
Speaker 1: or ten x what the NASDAK bubble was. It's it's stunning. Yeah.
Speaker 1: The Nikkei peaked very close to forty thousand, and I
Speaker 1: think that it's at it's nadir. Uh. It was somewhere
Speaker 1: around five thousand, and I don't know what it is now,
Speaker 1: but it's somewhere in the mid teens right now, I think.
Speaker 1: But it was it was the equivalent of the S
Speaker 1: and P five hundred during the dot coms was about
Speaker 1: thirty two times. I think the nick was a hundred
Speaker 1: times earnings at its peak or even worse. Yeah, very very,
Speaker 1: very very close to that. And that's what you know.
Speaker 1: People always talk about, my gosh, can the US stock
Speaker 1: market experience, Uh, what happened to the Japanese stock market
Speaker 1: post nineteen eighty nine, and the answer is it did
Speaker 1: of course. Uh In nine thirty two was the was
Speaker 1: the multiple that wildly out of whack, No, but the
Speaker 1: market fell by the S and P the the the
Speaker 1: dal Jones industrial average fell by about eighty eight percent,
Speaker 1: so it was the same order of magnitude of fall.
Speaker 1: The reason why I think it's unlikely we're unlikely to
Speaker 1: see anything like that happened to the US market, and
Speaker 1: why it's more believable in Japan is simply because you know,
Speaker 1: in nineteen ninety nine we only had a pe of
Speaker 1: like well as trailing p I think of forty and
Speaker 1: a cape of thirty, or maybe it was the other
Speaker 1: way around, a cape of forty and a por trailing
Speaker 1: pe of thirty, whereas now we're at a trailing pe
Speaker 1: of somewhere around twenty in a trailing cape of somewhere
Speaker 1: around what thirty? Yeah. Uh, So you know, it's much
Speaker 1: more believable that that happened in Japan that it will
Speaker 1: happen to us. And the cape. The rub on the
Speaker 1: Cape these days continues to be it's just gives you
Speaker 1: some insight into forward expectations, not a timing mechanism. It's
Speaker 1: it's been overvalued since something like eight percent of the time. Yeah.
Speaker 1: The one you finance way of saying it is that
Speaker 1: it's not a stationary parameter, okay, meaning that if you
Speaker 1: just look at how it works out of sample, it
Speaker 1: works very poorly. Out of sample and sample it works.
Speaker 1: But if you do, for example, what what Staunton, marsh
Speaker 1: and Dimpson did, which is to look at it at
Speaker 1: the say the dividend yield UH in multiple countries, and
Speaker 1: then you just stop the analysis each and every year,
Speaker 1: you look back UH, and you devise a set of
Speaker 1: rules depending on you know, that are based on looking
Speaker 1: back at a given point, and then you look how
Speaker 1: it does forward. It does very poorly going forward and
Speaker 1: in almost all countries. The one thing that that does
Speaker 1: work is is timing within countries, but that a different subject.
Speaker 1: So so out of sample is a big warning, UH
Speaker 1: to take the cape with a whole lot of grain
Speaker 1: assault exactly because you don't you don't know what the
Speaker 1: future distribution is going to look like. Alright, So our
Speaker 1: final two questions. If a millennial or recent college graduate
Speaker 1: came to you and said they're looking for advice about
Speaker 1: going into either medicine and neurology or finance and writing.
Speaker 1: What sort of advice would you give that medicine is
Speaker 1: a much surer way of making a living than writing is,
Speaker 1: that's for sure. I would. I tend to look at
Speaker 1: writing as something you do to amuse yourself in your dotage. Uh,
Speaker 1: it's it's it's it's fun. But if if you've got
Speaker 1: kids to raise and colleges to pay for, I I
Speaker 1: wouldn't become a writer. I would choose a much more
Speaker 1: solid profession. Live modestly. Uh, and then you know you
Speaker 1: can you can kick back and follow your blessing right
Speaker 1: if you feel like are. I've asked a number of
Speaker 1: doctors this question, and I'm curious as to your view.
Speaker 1: If your kids came to you and said they wanted
Speaker 1: a career in medicine, would when they were younger, would
Speaker 1: you have encouraged or discouraged them? Yeah? I would. I
Speaker 1: would encourage anybody who wants to go into real edison too.
Speaker 1: It's it's a very rewarding profession and uh it's it's
Speaker 1: it's a much more difficult profession than when I was
Speaker 1: in it because of all the bureaucracy and not only that,
Speaker 1: but you know, back in the day you could work
Speaker 1: for yourself. Now you'll almost certainly be working for the
Speaker 1: NBA from hell. Uh. Even even so, Uh, it's it's
Speaker 1: a it's a it's a fine profession that offers rewards
Speaker 1: that nothing else, no other professions that will provide you
Speaker 1: with And our final question, what is it that you
Speaker 1: know about the world of investing today you wish you
Speaker 1: knew when you first started out years ago. Well, there's
Speaker 1: this parlor game that economics like to play about how
Speaker 1: risky your stocks? Uh. And we've all heard the rationales
Speaker 1: of you know, how how they get risky or less
Speaker 1: more or less risky with time, and that how that
Speaker 1: argument goes back and forth. But what I've learned that
Speaker 1: I wish I knew back then is that it's a
Speaker 1: stupid question to ask without also adding for a given
Speaker 1: investor of a given age. Right, So, if you are
Speaker 1: a twenty year old saver who has a lot of
Speaker 1: human capital and no investment capital and a fifty year
Speaker 1: time horizon, stocks aren't the least bit risky. In fact,
Speaker 1: you should get down on your knees and pray for
Speaker 1: volatility and low returns all right. But once you know
Speaker 1: you're approaching your your geezer hood. Uh, stocks are are
Speaker 1: three mile Island toxic and you should be very approached
Speaker 1: them with with a great degree of caution. So I
Speaker 1: wished I had known when I was thirty years old
Speaker 1: that I could put acent of my savings into stocks
Speaker 1: and not worry at all about them. That makes perfect sense, Bill,
Speaker 1: Thank you so much for doing this. This has been
Speaker 1: absolutely fascinating. We have been speaking with Bill Bernstein. He
Speaker 1: is the author of numerous books. Go to Amazon or
Speaker 1: barn to Noble or wherever you pick up your books
Speaker 1: and you can see any of the dozen or so
Speaker 1: UM offerings he has, and I highly recommend any or
Speaker 1: all of them have Splendor exchange. UM. It was really
Speaker 1: fascinating and because of that, I'm gonna have to go
Speaker 1: get your book on on Media and Words. I was
Speaker 1: you said. It came and went so quickly. I don't
Speaker 1: even recall seeing that book come out, but this one
Speaker 1: I remember UM getting as soon as as it was published.
Speaker 1: So that thank you. Thank you for your time. UM.
Speaker 1: If you enjoy this conversation, We'll be sure to look
Speaker 1: up an Inch or down an Inch on Apple iTunes.
Speaker 1: And you can see any of the other two hundred
Speaker 1: and fifties such conversations we've had over the past five years. UM,
Speaker 1: we love your comments, feedback in suggestions right to us
Speaker 1: at m IB podcast at Bloomberg dot net. I would
Speaker 1: be remiss if I did not thank the crack staff
Speaker 1: that helps put together these conversations each week. But Dina
Speaker 1: Parwana is my audio engineer slash producer. Michael Boyle as
Speaker 1: our producer slash booker. Attica val Brunn is our project manager.
Speaker 1: Michael bat Nick is our head of research. I'm Barry Ritolts.
Speaker 1: You're listening to Masters in Business on Bloomberg Radio.