WEBVTT - Efficient Frontier Advisors Co-Founder & Neurologist Bill Bernstein 0:00:02.520 --> 0:00:11.879 Bloomberg Audio Studios, podcasts, radio news. This is Masters in 0:00:11.960 --> 0:00:15.480 Business with Barry Ritholts on Bloomberg Radio. 0:00:16.400 --> 0:00:21.000 This week on the podcast Another Banger, Bill Bernstein, neurologist, 0:00:21.079 --> 0:00:24.520 investor author, What a perfect time to talk to the 0:00:24.600 --> 0:00:28.040 author of the Birth of Plenty, and of course a 0:00:28.080 --> 0:00:32.199 splendid exchange about how trade has made us all so 0:00:32.320 --> 0:00:36.199 much wealthier. Really, a person who dives deep into the 0:00:36.240 --> 0:00:41.160 subject matter, understands it better than anybody else and could 0:00:41.159 --> 0:00:45.120 put it into great historical context. I thought this conversation 0:00:45.280 --> 0:00:48.239 was fascinating, and I think you will also with no 0:00:48.360 --> 0:00:54.240 further ado, my discussion with Bill Bernstein of Efficient Frontier Advisors. 0:00:55.360 --> 0:00:57.840 So you have such a fascinating career, I want to 0:00:57.840 --> 0:01:01.080 get into some of the details before we start talking 0:01:01.320 --> 0:01:07.520 about markets and investing. You practice neurology for twenty years. 0:01:07.520 --> 0:01:11.000 That's kind of unusual to say I've had enough of that. 0:01:11.120 --> 0:01:15.199 Let me start managing assets. Tell us about that transition. 0:01:15.400 --> 0:01:17.319 Well, first of all, it kept me off the streets, 0:01:17.360 --> 0:01:20.959 and secondly, I'm easily bored, so I do move from 0:01:21.000 --> 0:01:24.480 thing to thing. And it occurred to me all about 0:01:24.520 --> 0:01:27.080 forty years ago that I live in a country that 0:01:27.200 --> 0:01:30.600 doesn't have a functioning social safety net, and so I 0:01:30.640 --> 0:01:34.240 was going to have to invest and save on my 0:01:34.400 --> 0:01:37.960 own account to accomplish that. And I approached it the 0:01:38.000 --> 0:01:41.560 way I thought anyone with scientific training would do, which 0:01:41.600 --> 0:01:44.319 is I consulted the peer review literature. I read the 0:01:44.360 --> 0:01:48.960 basic texts, I collected data, I built models, and by 0:01:49.000 --> 0:01:51.520 the time I had done all that, I realized I 0:01:51.640 --> 0:01:56.000 had something that was useful to other small investors, and 0:01:56.040 --> 0:01:59.880 so I began to write things up. And I just 0:02:00.400 --> 0:02:03.520 that when you're writing about investing, one of the key 0:02:04.160 --> 0:02:06.840 subjects that you have to nail down is the history 0:02:06.840 --> 0:02:08.720 of finance. If you don't know the history, you're dead 0:02:08.760 --> 0:02:11.560 in the water. You know. Can you spell long term 0:02:11.600 --> 0:02:12.920 capital management? 0:02:13.560 --> 0:02:13.680 Uh? 0:02:14.000 --> 0:02:16.280 Just LTCM? Yeah, exactly, need to spell it. 0:02:17.200 --> 0:02:18.800 Yeah, I mean, if you know, you can, you know, 0:02:19.000 --> 0:02:21.920 solve differential equations as easily as most people brush teeth. 0:02:21.960 --> 0:02:24.040 But if you don't know the history, you're going to 0:02:24.080 --> 0:02:26.320 have your head handed to you, which is what happened 0:02:26.360 --> 0:02:29.120 to them. So I discovered that I enjoyed writing history, 0:02:29.160 --> 0:02:32.480 and so that's how I segued into into writing history. 0:02:33.080 --> 0:02:38.400 And footnote Roger Lowenstein's When Genius Failed is so instructive, 0:02:38.800 --> 0:02:42.359 not just because of the things you're referring to, failing 0:02:42.400 --> 0:02:45.720 to learn from history, the danger of leverage and you know, 0:02:45.880 --> 0:02:50.079 tiny inefficiencies, but it was also a cautionary tale that 0:02:50.240 --> 0:02:52.920 was ignored a few years later led right to the 0:02:52.919 --> 0:02:55.080 Great Financial Crisis, the same mistakes. 0:02:55.440 --> 0:02:59.200 Yeah, there's a historian by the name of Robert Kaplan 0:02:59.600 --> 0:03:05.160 who said that all of history is half geography and 0:03:05.240 --> 0:03:08.880 half Shakespeare. And when I heard that, it resonated. I 0:03:08.919 --> 0:03:11.720 realized that investing is the same way. It's half mathematics 0:03:12.000 --> 0:03:14.240 and half Shakespeare, and you have to manage. You have 0:03:14.280 --> 0:03:16.840 to master both of them. If you can't master both, 0:03:17.040 --> 0:03:18.600 you're dead in the water. 0:03:19.000 --> 0:03:23.040 Literally. My next question, you describe you describe it as 0:03:23.080 --> 0:03:26.400 half mathematics, half Shakespeare. Some people would call that art 0:03:26.440 --> 0:03:31.040 and science. But tell us why you need both compounding 0:03:31.200 --> 0:03:35.400 and exponential mathematics and the Bard to be successful as 0:03:35.440 --> 0:03:36.000 an investor. 0:03:36.280 --> 0:03:39.000 Well, it gets to what I call the prom queen 0:03:39.080 --> 0:03:40.880 theory of life, which is the different. 0:03:41.000 --> 0:03:43.960 Wait, the prom queen theory of life. 0:03:44.000 --> 0:03:47.640 Indeed, if you're the prom queen, then the most important 0:03:47.680 --> 0:03:50.160 thing in the world is how you dress and how 0:03:51.000 --> 0:03:53.520 you look, and that's how you judge other people. Brains, 0:03:53.560 --> 0:03:56.720 athletic ability, political ability don't matter. 0:03:57.040 --> 0:03:57.360 Well. 0:03:57.640 --> 0:04:00.720 Financiers are exactly the same way. If the peak of 0:04:00.760 --> 0:04:03.680 your skill set is your quantitative ability, that is how 0:04:03.760 --> 0:04:07.200 you judge other people. And if other people can't understand 0:04:07.920 --> 0:04:12.120 your models, then they're stupid, all right, getting you have 0:04:12.200 --> 0:04:15.200 to you know, the conceit of finance is that basically 0:04:15.880 --> 0:04:17.359 the math is all there is to it, and that 0:04:17.400 --> 0:04:20.599 you don't have a limbic system. They deny the existence 0:04:20.640 --> 0:04:24.479 of their emotions and their psychology, and that's what gets 0:04:24.520 --> 0:04:27.159 them into trouble. They don't understand the history and now 0:04:27.200 --> 0:04:30.320 how that feeds into mass fear and mass greed and 0:04:30.320 --> 0:04:33.080 mass illusions, which is why I wrote that particular book. 0:04:33.400 --> 0:04:36.560 Kind of reminds me of the Richard Feinemann quote imagine 0:04:36.600 --> 0:04:39.920 how much harder physics would be if electrons had feelings? 0:04:40.120 --> 0:04:40.600 Exactly? 0:04:40.800 --> 0:04:46.160 Yeah, so interesting. So since we mentioned Shakespeare, I have 0:04:46.200 --> 0:04:50.520 to ask the obvious question, what writers and investors have 0:04:50.880 --> 0:04:54.000 influenced how you invest and how you write? 0:04:54.520 --> 0:04:57.320 Oh, dear well, Jim Grant of course would be at 0:04:57.360 --> 0:05:01.520 the top of anyone's list, and then the person who's 0:05:01.600 --> 0:05:03.640 right at the top of that list was the was 0:05:03.680 --> 0:05:06.360 a Scottish guy who lived almost two hundred years ago. 0:05:06.440 --> 0:05:10.080 Charles Mackay who wrote Extraordinary Popular Delusions and The Madness 0:05:10.080 --> 0:05:13.880 of Crowds are actually memoirs of Extraordinary popular Delusions and 0:05:13.960 --> 0:05:16.640 the Madness of crowds, and he described all of the 0:05:16.640 --> 0:05:19.159 things that we've been seeing, you know, over the past 0:05:19.200 --> 0:05:22.560 couple of decades, more than two hundred years ago. 0:05:23.760 --> 0:05:27.640 So those are two well known names. Jim Grant is 0:05:27.680 --> 0:05:32.640 really best known as a macro analyst and a fixed 0:05:32.680 --> 0:05:36.400 income investor. How has Grant influenced how you look at 0:05:36.400 --> 0:05:37.839 the world of investing? 0:05:38.160 --> 0:05:42.960 Well, he's also a historian. You know, he's written several 0:05:43.040 --> 0:05:47.920 historically deep books, particularly about Bernard Baruk, but he certainly 0:05:48.560 --> 0:05:53.440 you know, describes the historical episodes of manias and panics. 0:05:53.480 --> 0:05:55.640 I guess the other one would be John Kenneth Galbraith, 0:05:56.080 --> 0:06:01.320 whose history of nineteen twenty nine crash was non non prole. 0:06:01.320 --> 0:06:04.120 I mean, it was just absolutely superb. You know, it's 0:06:04.160 --> 0:06:05.760 one of those books that you just can't help but 0:06:05.880 --> 0:06:09.000 you know, snickering out loud, you know, with every paragraph. 0:06:09.040 --> 0:06:13.680 And he has probably coined more quotes and phrases that 0:06:13.760 --> 0:06:18.200 other people unknowingly steal and don't credit him because they're 0:06:18.480 --> 0:06:20.799 just the essence of truth and wisdom. 0:06:21.080 --> 0:06:24.960 Yeah, especially you know, whenever anybody talks about innovation in finance, 0:06:25.000 --> 0:06:28.800 he describes it as reinventing the wheel, only in slightly 0:06:28.800 --> 0:06:29.839 more unstable form. 0:06:31.560 --> 0:06:35.000 That's pretty that's pretty amusing. We briefly talked about if 0:06:35.000 --> 0:06:38.200 it's in the headlines, if it's above the fold in 0:06:38.279 --> 0:06:41.799 the paper, it's already in price. So you're a proponent 0:06:41.839 --> 0:06:46.920 of modern portfolio theory and the efficient market hypothesis. How efficient? 0:06:47.240 --> 0:06:53.000 How much do market prices truly reflect future discounted cash flow? 0:06:53.240 --> 0:06:56.520 Well? Samuelson once wrote, I think in a private letter 0:06:56.600 --> 0:07:01.120 that the markets were micro efficient but macro inefficient. And 0:07:01.160 --> 0:07:04.680 what he meant by that by micro efficiency was that, 0:07:04.720 --> 0:07:07.000 as the both of us know, it is brutally hard 0:07:07.600 --> 0:07:10.080 and getting harder by the day to pick stocks in 0:07:10.160 --> 0:07:14.800 time the market. If you don't know that, you're in 0:07:14.800 --> 0:07:19.680 big trouble. But the markets are also can be macro inefficient. 0:07:20.160 --> 0:07:25.680 So the overall markets can overshoot in one direction or 0:07:25.680 --> 0:07:28.559 the other. It's very hard to almost impossible, to figure 0:07:28.560 --> 0:07:31.800 out exactly when that's going to happen. You can look 0:07:31.800 --> 0:07:34.120 at a market as abulian and frothy, and you can 0:07:34.160 --> 0:07:36.960 say I know what's going to happen, I just can't 0:07:37.000 --> 0:07:40.760 tell you when. So that to me is the best 0:07:41.160 --> 0:07:44.600 explanation or the best description of macro and micro efficiency 0:07:45.080 --> 0:07:47.640 there is. But you know, I mean, my message to 0:07:47.640 --> 0:07:50.960 anybody who's is twenty years old or twenty five years 0:07:50.960 --> 0:07:53.480 old and just coming out of their education and think 0:07:53.600 --> 0:07:56.360 they're going to be the next Warren Buffett, the bad 0:07:56.440 --> 0:07:58.520 news is you're trading against Warren Buffett. 0:07:58.560 --> 0:08:03.160 That's right, that's right. I have been told that markets 0:08:03.160 --> 0:08:06.200 can stay irrational longer than you can stay solvent. 0:08:06.640 --> 0:08:09.960 Yeah, that's an apocryphal quote from right from Canes yet. 0:08:09.920 --> 0:08:12.640 Right, but not really. I don't believe he ever said that. No, 0:08:12.800 --> 0:08:14.120 he certainly never wrote it. 0:08:14.200 --> 0:08:16.080 No, he never said it or wrote it. 0:08:16.480 --> 0:08:22.200 So, speaking of apocryphal times, you have said investors should 0:08:22.240 --> 0:08:26.320 build their portfolios for the worst two percent of market 0:08:26.320 --> 0:08:30.800 conditions rather than normal times. Tell us why you believe that, 0:08:31.040 --> 0:08:33.120 and how do we go about accomplishing that? 0:08:33.280 --> 0:08:37.120 Well, that's that directly falls out of Charlie Munger's dictum, 0:08:37.559 --> 0:08:41.200 which is that, yes, compounding is magic, but the first 0:08:41.600 --> 0:08:46.400 rule of compounding is never to interrupt it unnecessarily, and 0:08:47.280 --> 0:08:51.240 you're most liable to interrupt, compounding to panic and sell 0:08:51.520 --> 0:08:54.280 during the worst two percent of times. So you design 0:08:54.320 --> 0:08:56.640 your portfolio for the worst two percent of times, which 0:08:56.640 --> 0:08:59.520 means that it should be more conservative then you think 0:08:59.520 --> 0:09:03.120 it should be the other ninety eight percent of the time. 0:09:03.559 --> 0:09:07.679 And it's a suboptimal allocation to have less stocks. A 0:09:07.760 --> 0:09:10.520 suboptimal But what I like to say, is it a 0:09:10.559 --> 0:09:14.120 suboptimal allocation you can execute is better than an optimal 0:09:14.160 --> 0:09:17.320 one you can't execute. 0:09:15.880 --> 0:09:19.480 No doubt about that. You mentioned someone twenty twenty five. 0:09:19.720 --> 0:09:22.439 There are a number of people who have said, and 0:09:22.760 --> 0:09:25.720 I've been swayed in this direction. Hey, when you're twenty 0:09:25.720 --> 0:09:28.200 twenty five years old and you don't need this money 0:09:28.240 --> 0:09:32.360 for thirty forty fifty years, do you really need bonds 0:09:32.360 --> 0:09:35.439 to offset the volatility of equities. Shouldn't you be one 0:09:35.520 --> 0:09:37.600 hundred percent equities at that age? 0:09:38.120 --> 0:09:42.920 Theoretically yes, Practically no, because there are a few sentient 0:09:43.000 --> 0:09:46.480 beings in this quadrant of the galaxy that can tolerate 0:09:46.480 --> 0:09:47.760 one hundred percent stocks. 0:09:48.120 --> 0:09:51.880 Huh really really interesting. So you mentioned half math, half Shakespeare. 0:09:51.960 --> 0:09:55.160 Let's talk about the math side. So when you started 0:09:55.240 --> 0:10:00.360 looking at investing and bringing a scientific rigor to the process. 0:10:00.679 --> 0:10:04.840 You created your own set of asset class databases. This 0:10:04.920 --> 0:10:10.640 is before CRISP and other widely available databases. Tell us 0:10:10.640 --> 0:10:11.760 how you want about doing this? 0:10:11.960 --> 0:10:13.520 Oh no, no, I stole it from them. 0:10:13.559 --> 0:10:14.080 Oh you did? 0:10:14.200 --> 0:10:16.840 Yeah? I mean I went out and spent full disclosure. 0:10:16.920 --> 0:10:19.280 Yeah yeah, no, I mean, I mean what did I do? 0:10:19.360 --> 0:10:21.880 I went out. I did what anybody would do in 0:10:21.880 --> 0:10:25.080 that situation, which I spent ninety five dollars which seemed 0:10:25.080 --> 0:10:27.959 like a king's ransom at the time, for the Ibbitson yearbook. 0:10:28.320 --> 0:10:32.319 And I transcribed all you know, nine hundred and eighty 0:10:32.320 --> 0:10:35.360 five data points into a spreadsheet which I had just 0:10:35.440 --> 0:10:38.440 learned how to use, you know, sometime around nineteen ninety. 0:10:39.120 --> 0:10:41.199 And then that was the start of my models. And 0:10:41.200 --> 0:10:44.560 the other people provided me with data. Ken Fisher, bless 0:10:44.559 --> 0:10:47.320 his soul, supplied me with a fair amount of data, 0:10:47.640 --> 0:10:51.120 and I, you know, impersonated a professional investor at certain 0:10:51.200 --> 0:10:53.080 large banks and was able to get data sits from 0:10:53.120 --> 0:10:54.680 them as as well. 0:10:55.720 --> 0:10:58.920 By the way, I find Ken Fisher to be one 0:10:58.960 --> 0:11:05.280 of the more fascinating people in finance, because not only 0:11:05.720 --> 0:11:09.240 did he bring a writer's perspective. I think he was 0:11:09.280 --> 0:11:13.920 the longest running Forbes columnist at like forty three years, 0:11:13.920 --> 0:11:17.680 some crazy number, writing a monthly column for them. But 0:11:18.240 --> 0:11:23.079 he was both an investor and a very accomplished business 0:11:23.120 --> 0:11:27.440 person in terms of like he was early in direct mail, 0:11:27.559 --> 0:11:29.920 he was early in the Internet, he was early in 0:11:30.720 --> 0:11:33.720 just as running a business, just throwing stuff against the wall, 0:11:33.760 --> 0:11:37.960 seeing what stuck, and just ab testing, iterating on a 0:11:38.000 --> 0:11:42.400 continual basis, long before Google started doing that online. He 0:11:42.480 --> 0:11:46.480 was one of the early people who developed here's what 0:11:46.720 --> 0:11:50.960 financial asset management marketing should look like. 0:11:51.360 --> 0:11:53.720 Yeah, and he did all those things, and he's also 0:11:53.880 --> 0:11:58.000 a superb writer and observer. I think you interviewed him 0:11:58.520 --> 0:12:01.400 a couple of times, Yeah, once or twice, maybe once 0:12:01.480 --> 0:12:05.720 memorably and well there was that sure, And you know, 0:12:05.920 --> 0:12:07.719 he said something on one of your interviews that that 0:12:07.840 --> 0:12:10.120 stuck with me, you know, for the past twenty years, 0:12:10.920 --> 0:12:13.760 which is that he pays close attention to the headlines 0:12:14.480 --> 0:12:16.960 because he knows that if something is above the fold, 0:12:16.960 --> 0:12:20.200 it's already been impounded into prices and can be safely ignored. 0:12:20.520 --> 0:12:22.320 That's exactly right. I thought you were going in a 0:12:22.320 --> 0:12:26.920 different direction the first time quick digression. The first time 0:12:26.960 --> 0:12:30.199 I interviewed him right in the studio. He was kind 0:12:30.280 --> 0:12:32.960 enough to do an interview with me in the first 0:12:33.040 --> 0:12:37.240 year of the podcast, which was, you know, admittedly pretty terrible. 0:12:37.280 --> 0:12:40.840 I was very rough around the edges, and it was 0:12:41.120 --> 0:12:44.199 very formal and rigorous and tell us about small cap 0:12:44.240 --> 0:12:47.840 and tell us about emerging market value. And it was 0:12:47.920 --> 0:12:51.959 really on the you know, just kind of straight down 0:12:52.000 --> 0:12:56.200 the line and really boring. And afterwards we're having a 0:12:56.240 --> 0:12:59.760 conversation as the new firm going pretty good, we're a 0:12:59.760 --> 0:13:02.559 few hundred million dollars, blah blah blah. You know, we 0:13:02.960 --> 0:13:06.400 come in second very often on some of these big households. 0:13:06.440 --> 0:13:09.640 And he said to me, wait till you're five years 0:13:09.679 --> 0:13:13.480 old and a billion dollars in assets under management, and 0:13:13.520 --> 0:13:15.440 the world will open up to you, because no one 0:13:15.440 --> 0:13:17.959 with real money wants to give, you know, a small 0:13:18.000 --> 0:13:21.559 firm with no history a big chunk of cash. And 0:13:21.600 --> 0:13:24.559 we just started talking about how the business ran and 0:13:24.600 --> 0:13:28.560 how he delegated authority and how he built stuff. And 0:13:28.640 --> 0:13:31.440 I'm sitting there listening to them, listening to him, and 0:13:31.480 --> 0:13:36.360 saying to myself, idiot, this is the conversation, not the 0:13:36.400 --> 0:13:39.080 small cap nonsense. You just spent an hour chatting about 0:13:39.520 --> 0:13:43.280 And when he finished schooling me, I said, can you 0:13:43.360 --> 0:13:46.600 come back one day and we'll discuss that because this 0:13:46.640 --> 0:13:49.520 is fascinating and he goes, sure, anytime. So a year 0:13:49.640 --> 0:13:52.400 later we came back and had the conversation we should 0:13:52.400 --> 0:13:56.720 have had. He has always impressed with me with how 0:13:57.440 --> 0:14:02.760 insightful and unique his perspective is. I mean, we're all 0:14:02.800 --> 0:14:05.760 a little neurodivergent. He has his issues, I have mine, 0:14:06.200 --> 0:14:09.200 but I just find him to be an absolutely fascinating guy. 0:14:09.360 --> 0:14:10.840 I mean, if we can get into just a little 0:14:10.840 --> 0:14:13.720 bit of neurophysiology here, there's something called the well. 0:14:13.640 --> 0:14:16.840 You happen to be a neurologist, so let's have at it. 0:14:16.880 --> 0:14:20.920 There's something called the default mode network, which is a 0:14:20.920 --> 0:14:25.120 part of your brain that becomes electrically active when you're 0:14:25.160 --> 0:14:28.480 at rest and which turns itself off when you're doing 0:14:28.560 --> 0:14:32.440 any focused task. And it turns out you can locate 0:14:32.480 --> 0:14:35.920 it anatomically on imaging studies, and people who have well 0:14:35.960 --> 0:14:39.960 developed anatomically well developed default mode networks tend to be 0:14:40.120 --> 0:14:44.640 very good at reading other people and have good emotional intelligence. 0:14:44.680 --> 0:14:46.680 The opposite of that is in people who are on 0:14:46.720 --> 0:14:49.560 the spectrum who have small default mode networks and are 0:14:49.600 --> 0:14:51.320 not good at reading other. 0:14:51.200 --> 0:14:54.800 People, and so he kind of blunt by the way, 0:14:54.800 --> 0:14:58.680 the firm is done fine. They've recovered from his stumble. 0:14:58.800 --> 0:15:01.600 I don't know if it was even pre pandemic. And 0:15:01.640 --> 0:15:04.480 I thought he kind of got slagged by a lot 0:15:04.480 --> 0:15:07.600 of people unfairly. The guy has been a public figure 0:15:07.640 --> 0:15:09.960 for forty five years. He's been at least writing in 0:15:10.040 --> 0:15:15.360 public for all that time. You know, sometimes stuff happens, 0:15:15.400 --> 0:15:20.040 and in a sort of social media gotcha environment. 0:15:20.520 --> 0:15:25.400 To say nothing of being a spectacularly effective environmentalist. 0:15:26.000 --> 0:15:29.960 So on our last interview with him, we talked about 0:15:30.160 --> 0:15:34.600 all the trees and woods that he has purchased and 0:15:34.680 --> 0:15:39.840 put into permanent conservation. He's done giant studies on sequoias 0:15:39.840 --> 0:15:43.200 and redwoods. I think he's one of the leading experts 0:15:43.240 --> 0:15:46.440 in a specific type of tree known in the Pacific Northwest. 0:15:46.840 --> 0:15:51.680 He's really like a wildly fascinating guy, and I hope 0:15:51.720 --> 0:15:56.000 people don't judge him for that. I mean, I don't 0:15:56.040 --> 0:15:59.720 know what to call it. That politically incorrect snafu. I 0:16:00.240 --> 0:16:02.440 think he meant it in any other way, and it, 0:16:02.760 --> 0:16:04.640 you know, they kind of had to reel him in 0:16:04.680 --> 0:16:07.760 a bit. But the farm is doing fine. His farm 0:16:07.840 --> 0:16:10.440 is doing fine. And there was like about a five 0:16:10.480 --> 0:16:14.120 billion dollar outflow. But when you're one hundred and five 0:16:14.160 --> 0:16:16.840 or one hundred and ten billion dollars, all right, you 0:16:16.920 --> 0:16:18.840 got to dance with who brought you there? He built 0:16:18.880 --> 0:16:21.320 it up to that. But I find him to be 0:16:21.320 --> 0:16:22.360 really an interesting guy. 0:16:22.840 --> 0:16:25.280 Yeah, and he has the address here on Lexington, so 0:16:25.320 --> 0:16:26.680 he knows where to send the chocolates. 0:16:28.840 --> 0:16:30.840 I think I'm going to begin with a quote that 0:16:31.000 --> 0:16:34.080 I stole from Bill to start a chapter of my 0:16:34.200 --> 0:16:37.800 new book. To the extent you succeed in finance, you 0:16:37.840 --> 0:16:42.400 succeed by suppressing the limbic system, your system one, the 0:16:42.560 --> 0:16:47.240 very fast moving emotional system. If you cannot suppress that, 0:16:47.960 --> 0:16:52.080 you are going to die poor. I love that quote. 0:16:52.680 --> 0:16:55.080 Is it an exaggeration or is it accurate? 0:16:55.440 --> 0:16:57.800 No, it's it's extremely accurate. Let me tell you a 0:16:57.840 --> 0:17:03.120 personal story. I have a good friend who is a 0:17:03.160 --> 0:17:07.160 wealthy person, and that has enabled this person to have 0:17:07.280 --> 0:17:13.840 a career in public service, and she's done very very well. 0:17:13.840 --> 0:17:16.400 And one day, after I'd known her for many, many years, 0:17:16.400 --> 0:17:19.520 she told me that her sister was poor. All right? 0:17:20.000 --> 0:17:22.360 Or did not have a lot of money. And I said, 0:17:22.440 --> 0:17:25.080 I don't understand this. Was she disinherited? Did she make 0:17:25.119 --> 0:17:27.920 the family angry? And she looked at me straight in 0:17:28.000 --> 0:17:30.200 the eye and she said no, she was afraid of stocks. 0:17:30.800 --> 0:17:34.600 Really yeah, And so that's the difference. If you can 0:17:34.640 --> 0:17:37.879 suppress that fear, you will do very well, and if 0:17:37.920 --> 0:17:41.920 you can't suppress the fear, then you probably will die poor. 0:17:42.640 --> 0:17:46.280 So it's so fascinating you said that you must have 0:17:46.320 --> 0:17:50.639 a similar situation. I live in liberal New York. You 0:17:51.160 --> 0:17:55.159 live in liberal Oregon, right, But we have clients that 0:17:55.200 --> 0:17:57.920 are on the left and the right. And so anytime 0:17:57.960 --> 0:18:02.520 you put out a commentary on current affairs, not only 0:18:02.640 --> 0:18:05.040 because you don't want to offend half your clients, but 0:18:05.080 --> 0:18:08.399 because it's a good analytical strategy to try and go 0:18:08.480 --> 0:18:12.760 down the middle. Be objective and fact based. But whatever 0:18:12.800 --> 0:18:15.440 your personal bias is, keep it, keep it out of it. 0:18:16.040 --> 0:18:18.760 And I wrote something up about what are the best 0:18:18.760 --> 0:18:21.000 and worst case scenarios about the tariffs, And we'll talk 0:18:21.040 --> 0:18:25.479 a ton later about tariffs. But the fascinating thing is 0:18:25.560 --> 0:18:27.639 when you look at history, and you look at a 0:18:27.760 --> 0:18:31.120 chart of everything that's happened, go back one hundred years, 0:18:31.119 --> 0:18:34.280 go back to nineteen twenty six. There's always a reason 0:18:34.320 --> 0:18:37.600 to sell stocks year in, year out. There's always some 0:18:38.320 --> 0:18:43.280 spectacularly crazy news that says this is gonna be terrible. 0:18:43.280 --> 0:18:46.760 I want to sell. And if you're selling in response 0:18:46.880 --> 0:18:50.479 to headlines, you know, and you're gonna wait for the 0:18:50.800 --> 0:18:53.359 dust to clear by that it's too late. You've missed 0:18:53.520 --> 0:18:56.720 most of the recovery. How do we deal with that 0:18:57.400 --> 0:19:02.439 never ending threat that persists? This time is different since 0:19:02.840 --> 0:19:06.439 and carent affairs the headlines today? Does it feel like 0:19:06.560 --> 0:19:09.600 the tariffs are different? Or is this no different than 0:19:10.000 --> 0:19:13.560 the Great Financial Crisis, the pandemic, the dot com implosion, 0:19:14.000 --> 0:19:17.240 go down the list to say nothing of the Kennedy 0:19:17.280 --> 0:19:21.159 assassination nine to eleven, Like there are endless reasons to 0:19:21.240 --> 0:19:24.040 be panicked about what's going on in the world. 0:19:24.320 --> 0:19:27.800 Yes, this time certainly was different. Never before in American 0:19:27.880 --> 0:19:32.320 history has a colossally incompetent American president tried to creator 0:19:32.400 --> 0:19:34.959 the economy. And that's it's very different. 0:19:35.160 --> 0:19:37.360 Do you think that was his purpose? Is he like, hey, 0:19:37.359 --> 0:19:39.360 we cause the recession rates come down and that's good 0:19:39.400 --> 0:19:40.080 for real estate? 0:19:40.200 --> 0:19:44.680 Or I think we've talked about this one. The Rosetta 0:19:44.720 --> 0:19:48.600 Stone of Donald Trump is a call in show he 0:19:48.680 --> 0:19:52.199 did with Howard Stern along with his daughter and his 0:19:52.320 --> 0:19:56.800 son Junior, And Howard looked at him and said, quick, 0:19:56.920 --> 0:20:00.760 multiply six times seventeen. All right. None of the three 0:20:00.800 --> 0:20:04.679 of them could do itred two. Well, that's the whole point. 0:20:05.320 --> 0:20:08.919 And you know, Don Junior laughed, he thought it was funny. 0:20:09.480 --> 0:20:11.120 Ivankas said, oh no, you don't have to be able 0:20:11.160 --> 0:20:11.800 to do math. 0:20:11.680 --> 0:20:15.120 To do real estate or investing for that math. 0:20:15.400 --> 0:20:18.320 But the most interesting response was Donald's. He said, no, 0:20:18.359 --> 0:20:20.879 it's one hundred and twelve, and he argued with Howard 0:20:20.880 --> 0:20:22.960 Stern about whether it was one hundred and two or 0:20:22.960 --> 0:20:24.320 one hundred and twelve. 0:20:24.320 --> 0:20:27.240 Six times ten is sixty six times seven is forty two, 0:20:27.400 --> 0:20:30.320 sixteen forty two. I mean that's how I do math 0:20:30.320 --> 0:20:31.639 in my head. I don't know how you do it. 0:20:31.760 --> 0:20:33.840 Yeah, yeah, there's yeah, that's one way to do it. 0:20:33.960 --> 0:20:37.480 Or you might know that three times seventeen is fifty one, okay, 0:20:37.520 --> 0:20:40.439 and you could double it, double it exactly. And so 0:20:40.600 --> 0:20:43.520 this is a math problem that you know, a reasonably 0:20:43.520 --> 0:20:47.080 bright middle school student can handle. None of the three 0:20:47.119 --> 0:20:49.320 Trumps could do it, okay, and so this is the 0:20:49.320 --> 0:20:53.400 guy who's now directing our economy. So that's different. All right, Well, 0:20:53.520 --> 0:20:56.320 how different was that from nine to eleven? All right, 0:20:56.400 --> 0:20:57.719 nine to eleven was sure different. 0:20:58.000 --> 0:21:01.480 I mean, arguably, Jeorge H. W. Bush is in the 0:21:01.520 --> 0:21:05.320 sharpest tool in the in the box. Barack Obama had 0:21:05.440 --> 0:21:09.520 no national experience whatsoever, had no idea how really the 0:21:09.600 --> 0:21:13.960 national apparatus worked. You could do this on both sides 0:21:14.000 --> 0:21:16.840 to some degree. You're saying this time really. 0:21:16.840 --> 0:21:19.159 Oh yeah, yeah, yeah, this is this is this, this 0:21:19.240 --> 0:21:21.640 is completely there were there were adults in the room 0:21:22.040 --> 0:21:24.159 during the Bush presidency, and there were adults in the 0:21:24.240 --> 0:21:27.400 room during the first Trump presidency. They're all gone now. 0:21:28.119 --> 0:21:30.560 And yet the market continued to go higher during the 0:21:30.600 --> 0:21:34.120 first Trump presidency regardless of who was president. 0:21:33.880 --> 0:21:37.480 Because they took him literally but not seriously. 0:21:37.760 --> 0:21:41.159 Other way around, Yeah, seriously but not literally. Yeah, this 0:21:41.320 --> 0:21:43.639 time I think we should be taking him literally but 0:21:43.720 --> 0:21:44.360 not seriously. 0:21:44.480 --> 0:21:47.120 Yeah. Yeah, that's right, got it reversed exactly. 0:21:47.240 --> 0:21:51.040 Yeah, the great So we talked earlier about the efficient 0:21:51.119 --> 0:21:56.320 market hypothesis. So to be fair to the president, he's 0:21:56.359 --> 0:21:59.879 been talking about Tariff's whole adult life. He says, Tariff 0:21:59.920 --> 0:22:02.119 is the most beautiful word in the dictionary. He says, 0:22:02.480 --> 0:22:07.479 I'm tariff man. Why were the markets so surprised by 0:22:07.600 --> 0:22:12.080 Liberation Day when here's a guy who has told you, 0:22:12.640 --> 0:22:16.760 I'm going to implement big, beautiful tariffs in my second term. 0:22:17.160 --> 0:22:20.800 Why did the market have to adjust revenue and earnings 0:22:20.840 --> 0:22:26.520 expectations down substantially after April second if the market's so efficient. 0:22:26.359 --> 0:22:28.800 Well, I think that the reason why is because he 0:22:29.280 --> 0:22:31.360 didn't do ninety percent of the other things he said 0:22:31.359 --> 0:22:32.840 he was going to do. He was going to repeal 0:22:32.840 --> 0:22:37.280 Obamacare and give us a big, beautiful healthcare system. He 0:22:37.480 --> 0:22:42.840 was going to redo our infrastructure. He was going to 0:22:43.600 --> 0:22:45.760 establish peace in the Ukraine on day one. 0:22:46.119 --> 0:22:48.960 And I think that his breaking and the price of eggs, yeah. 0:22:48.840 --> 0:22:51.520 Exactly, And I think that his I think that his 0:22:52.520 --> 0:22:54.879 promise on tariff's just got put in the bin with 0:22:54.920 --> 0:22:57.480 the rest of the stuff. He obviously wasn't going to 0:22:57.480 --> 0:22:58.159 do it and didn't do. 0:22:59.320 --> 0:23:02.360 But I think people did take him seriously. They did expect, 0:23:03.280 --> 0:23:08.680 you know, the sort of muscular US foreign policy and 0:23:09.320 --> 0:23:13.120 take tough you know, a tough stance with the Middle East, 0:23:13.160 --> 0:23:17.000 a tough stance with the Russia Ukraine War, and he's 0:23:17.040 --> 0:23:21.879 going to bring prices down. That's why I believe most 0:23:22.080 --> 0:23:26.480 of his non hardcore supporters voted him. I think a 0:23:26.520 --> 0:23:30.040 lot of people were kind of surprised by what he's done. 0:23:30.480 --> 0:23:34.440 Are you suggesting that we should not be long term 0:23:34.480 --> 0:23:37.960 investors and step aside or do we just have to 0:23:38.160 --> 0:23:39.160 ride this out? 0:23:39.400 --> 0:23:39.480 No? 0:23:39.800 --> 0:23:42.280 I think that it's this time is different in the 0:23:42.320 --> 0:23:45.159 same way that all the other times were were different. 0:23:45.320 --> 0:23:49.920 I mean, you know October nineteenth, you know nineteen eighty seven, Boy, 0:23:49.960 --> 0:23:52.159 that was sure different. We've never seen that before and 0:23:52.160 --> 0:23:54.480 we've never seen it since. And the smart thing to 0:23:54.560 --> 0:23:57.960 do on October twentieth of nineteen eighty seven was to 0:23:57.960 --> 0:23:58.560 buy stocks. 0:23:58.760 --> 0:23:59.000 Right. 0:23:59.400 --> 0:24:02.160 So when you say so, not that you had time 0:24:02.800 --> 0:24:05.000 like I was hoping, we would be down. I don't 0:24:05.000 --> 0:24:07.680 get excited about down eight to ten percent, but down 0:24:07.760 --> 0:24:10.960 twenty percent, you've got my attention. I want to start 0:24:11.000 --> 0:24:14.000 legging into more equities. We never quite got there on 0:24:14.040 --> 0:24:17.040 the SMP, right, I think, well we down eighteen percent, 0:24:17.080 --> 0:24:17.800 seventeen percent. 0:24:18.160 --> 0:24:20.440 Yeah, And it's the same thing with you know late 0:24:20.560 --> 0:24:23.120 March of twenty twenty, Boy, that was fast. 0:24:22.960 --> 0:24:26.240 Thirty four percent seventeen days. So if you were looking 0:24:26.280 --> 0:24:29.560 for down twenty You got it. You just only had 0:24:29.560 --> 0:24:30.600 a day or two to react. 0:24:30.720 --> 0:24:33.280 Yeah, I don't, you know. I try to stay away 0:24:33.280 --> 0:24:36.480 from correction ten percent bear market twenty percent. To me, 0:24:36.520 --> 0:24:37.280 that's numerology. 0:24:37.320 --> 0:24:39.840 There's no difference one hundred you and I know, you know, 0:24:39.960 --> 0:24:43.040 I find the base ten like what you have ten 0:24:43.080 --> 0:24:45.800 fingers and ten toes. So twenty percent is a bear market. 0:24:46.560 --> 0:24:48.520 There's just no data that supports that. 0:24:48.680 --> 0:24:51.080 No, there's no difference between the market being down nineteen 0:24:51.119 --> 0:24:55.080 percent and down being down twenty one percent. It behaves 0:24:55.119 --> 0:24:56.320 the same way in both cases. 0:24:56.440 --> 0:24:59.919 Arguably. If so, maybe I should make our rebalance BA 0:25:00.400 --> 0:25:03.680 instead of being down twenty percent, maybe it's down sixteen percent. 0:25:04.080 --> 0:25:06.600 So you get executed and then add a second one 0:25:06.680 --> 0:25:07.840 down twenty four percent. 0:25:07.920 --> 0:25:12.360 Yeah, until you get to you know, March of nine, 0:25:12.480 --> 0:25:15.439 and there you've rebalanced. You've thrown all your cash in 0:25:15.520 --> 0:25:16.600 three different times. 0:25:17.160 --> 0:25:19.560 And but you know, if you've thrown away your cash, 0:25:19.760 --> 0:25:23.080 it kind of works out. The really the really strange 0:25:23.119 --> 0:25:27.440 thing about bear markets, and I'm my frame of reference 0:25:27.520 --> 0:25:31.000 is not just twenty to twenty thirteen, but the Dow 0:25:31.240 --> 0:25:35.200 kisses one thousand in nineteen sixty six and it doesn't 0:25:35.200 --> 0:25:38.080 get over and on a permanent basis till nineteen eighty two. 0:25:38.880 --> 0:25:43.119 And if you just continued to dollar cost average for 0:25:43.200 --> 0:25:47.880 those sixteen years, or from twenty to twenty thirteen, when 0:25:47.960 --> 0:25:52.240 the market finally got over all its previous highs, that's 0:25:52.280 --> 0:25:54.399 when you start to make a ton of money because 0:25:54.760 --> 0:26:00.400 that next cyclical I'm sorry, that next secular move. Those 0:26:00.400 --> 0:26:03.480 bad buys you've made over the past ten years, suddenly 0:26:03.520 --> 0:26:04.320 they start flower. 0:26:05.080 --> 0:26:08.840 Yeah, there's this academic parlor game we're both aware of, 0:26:09.240 --> 0:26:12.439 which is the argument is do stocks get riskier with 0:26:12.440 --> 0:26:16.840 a longer time horizon? And the correct academic answer is yes, 0:26:17.119 --> 0:26:19.680 they do. But the assumption there is that you're a 0:26:19.720 --> 0:26:22.480 buy and hold investor, all right, But there are other 0:26:22.560 --> 0:26:25.280 kinds of investors besides buy and hold investors. If you 0:26:25.440 --> 0:26:30.800 are a periodic savory, you're a young person who's putting 0:26:30.800 --> 0:26:33.520 money away, then stocks are really not all that risky 0:26:33.560 --> 0:26:37.440 for the reason you just gave. On the other hand, 0:26:37.480 --> 0:26:39.960 if you're a retiree and you have no more human 0:26:40.119 --> 0:26:45.240 capital left than stocks are three mile Island dangerous? You are? 0:26:45.600 --> 0:26:48.240 You know, you have to explain what that means to a. 0:26:48.280 --> 0:26:51.320 Young Yeah, there was a nuclear There was a nuclear 0:26:51.359 --> 0:26:53.639 accident which was sort of the junior early version of 0:26:53.680 --> 0:26:57.720 Chernobyl at three Mile Island outside Harrisburg, Pennsylvania. There was 0:26:57.720 --> 0:27:00.880 a movie that was that was parody of all Yeah, yeah, 0:27:00.880 --> 0:27:05.800 the China syndrome. That's right, uh and and and so 0:27:06.080 --> 0:27:08.840 the point being that if you're an older person, stocks 0:27:08.920 --> 0:27:11.840 are are risky. And you could say, if you're you know, 0:27:11.920 --> 0:27:14.160 like me, you don't have a lot of human capital left, well, 0:27:14.440 --> 0:27:18.080 five out of six times, uh, stocks have higher returns 0:27:18.080 --> 0:27:20.400 in bonds. So even in retirement, I should have plenty 0:27:20.760 --> 0:27:23.240 of stocks. And that's like saying that when you play 0:27:23.320 --> 0:27:25.320 Russian roulette five out of six times you win. 0:27:27.240 --> 0:27:30.000 I guess five out of six times. But that said 0:27:30.200 --> 0:27:33.200 that that six time is a doozy, isn't it exactly? 0:27:33.200 --> 0:27:36.000 It's it's it's all about asymmetric consequences. It's if you're 0:27:36.000 --> 0:27:39.240 if you're invested too heavily in bonds and you should 0:27:39.280 --> 0:27:41.040 have been invested in stocks, well you don't get to 0:27:41.040 --> 0:27:43.359 fly first class, you don't get to buy the beamer. 0:27:43.880 --> 0:27:44.120 Uh. 0:27:44.160 --> 0:27:46.879 But on the other hand, if you invest too heavily 0:27:46.920 --> 0:27:50.480 in stocks and you're wrong, then you're bunking with your kids. 0:27:50.920 --> 0:27:53.239 Right, if you're an older investor and you don't have 0:27:53.240 --> 0:27:56.040 that time horizon, right. Yeah, someone someone said to me, 0:27:56.080 --> 0:27:59.760 can you really look through the next four years if 0:27:59.760 --> 0:28:02.840 you're not retiring for ten or twenty years, or if 0:28:02.880 --> 0:28:05.720 your kids five twenty nine, they're not going to school 0:28:05.760 --> 0:28:10.400 for ten fifteen years. That's the easy question. The challenge 0:28:10.440 --> 0:28:13.679 is what happens if you're retiring in twenty five, twenty six, 0:28:13.840 --> 0:28:18.160 twenty seven, right in the next three years. You know, 0:28:18.240 --> 0:28:22.480 that sequence of returns problem is really thorny. I think 0:28:22.480 --> 0:28:24.240 it was Bill Sharp said, it's one of the most 0:28:24.240 --> 0:28:27.040 difficult problems in all of finance. How much do you 0:28:27.160 --> 0:28:30.240 draw down each year? We all use four percent as 0:28:30.240 --> 0:28:32.640 an average, but how much do you draw down each 0:28:32.680 --> 0:28:35.560 year if your first couple of years of retirement is 0:28:35.720 --> 0:28:37.919 down five, down, ten, down, twenty percent? 0:28:38.160 --> 0:28:41.040 Yeah, there's this one or wonderful little bit of quantitative 0:28:41.080 --> 0:28:43.280 work done by Mike Kitsis. And wait, foul about you 0:28:43.320 --> 0:28:47.360 know the reversel glide slope, which is you actually raise 0:28:47.400 --> 0:28:51.080 your equity allocation the further into retirement you get, and 0:28:51.080 --> 0:28:53.040 that just if you think about it logically, it just 0:28:53.080 --> 0:28:55.600 falls right out of that your first your first five 0:28:55.640 --> 0:28:58.080 ten years of retirement, you want to be fairly conservative 0:28:58.200 --> 0:29:00.280 just for that reason. And then when you're eight years 0:29:00.320 --> 0:29:02.040 old and you know you'll be pushing up the daisies 0:29:02.840 --> 0:29:05.479 in five or ten years, then you can be more 0:29:05.520 --> 0:29:09.480 aggressive because you don't need that much of a liability 0:29:09.520 --> 0:29:11.000 match in portfolio at that age. 0:29:11.360 --> 0:29:14.640 Huh really really interesting. So you wrote a short book 0:29:14.680 --> 0:29:19.200 called Deep Risk talking about different types of risk. Explain 0:29:19.360 --> 0:29:21.560 what is deep risk? What is shallow risk? 0:29:22.000 --> 0:29:24.400 Well, shallow risk is the way we normally think about risk. 0:29:24.440 --> 0:29:28.320 There's this theoretical finance dogma that risk is the same 0:29:28.360 --> 0:29:34.320 as variance or standard deviation. And the problem with that 0:29:34.520 --> 0:29:38.440 is that's only true in the short term short term volatility, 0:29:38.720 --> 0:29:41.840 and short term volatility is not of any real importance 0:29:41.880 --> 0:29:44.960 to the long term investor. The real risk of long 0:29:45.040 --> 0:29:48.320 term investing is not having enough assets to pay for 0:29:48.360 --> 0:29:53.720 your living expenses five, ten, fifteen, twenty thirty years from now. 0:29:53.840 --> 0:29:55.959 So what are the things? What are the what are 0:29:55.960 --> 0:30:01.720 the events that can that can impair that? Big ones? Inflation? Inflation? 0:30:01.960 --> 0:30:05.760 Hyper inflation in particularly is extremely common. It is almost 0:30:05.840 --> 0:30:09.880 the rule rather than the exception. Really, sure, you look, 0:30:10.040 --> 0:30:12.720 all you have to do is ask yourself, what unit 0:30:12.760 --> 0:30:15.479 of currency that would buy yourself something in the year 0:30:15.560 --> 0:30:17.920 nineteen hundred can still buy yourself something today? Well, the 0:30:17.960 --> 0:30:21.120 US dollar can still buy yourself something, okay, can buy 0:30:21.160 --> 0:30:24.840 you something. A Japanese yen sure can and it can't. 0:30:24.840 --> 0:30:27.640 An English pound can, and a Swiss franc maybe can 0:30:27.680 --> 0:30:29.320 buy you a candy bar if you find the right 0:30:29.360 --> 0:30:36.880 store in Geneva or more likely burn and so you 0:30:36.920 --> 0:30:39.320 know those, you know, they're the case of the yen 0:30:39.400 --> 0:30:42.320 and the French franc and the German lera are much 0:30:42.320 --> 0:30:45.680 more common than the US dollar and the Swiss frank 0:30:45.760 --> 0:30:46.680 and the English pound. 0:30:46.720 --> 0:30:49.280 Those German deutsch Mark, Italian lera. 0:30:49.240 --> 0:30:53.560 Exactly exactly, Yeah, I mean you start with, you know, 0:30:54.680 --> 0:30:57.080 a reich mark in the year nineteen twenty and you 0:30:57.120 --> 0:30:59.400 know by nineteen twenty three, late nineteen twenty three, you 0:30:59.400 --> 0:31:02.640 were down to one trillionth of its personal purchasing power. 0:31:02.920 --> 0:31:05.560 That's hyper inflation. So that's the rule. So that's the 0:31:05.600 --> 0:31:08.240 most common thing that you have to worry about, and 0:31:08.280 --> 0:31:11.520 that is, relatively speaking, the easiest one to defend against. Now, 0:31:11.520 --> 0:31:14.160 there are other three other things that can well. 0:31:14.040 --> 0:31:15.840 Wait before you go to the other three things. How 0:31:15.880 --> 0:31:16.920 do you defend against that. 0:31:18.160 --> 0:31:20.160 Well. First of all, in the US, we have these 0:31:20.360 --> 0:31:23.959 marvelous instruments called tips, and all you have to do 0:31:24.080 --> 0:31:26.960 is worry about, you know, the Department of Labor rejiggering 0:31:28.080 --> 0:31:31.280 the inflation adjustment, which is something to worry about. But 0:31:32.200 --> 0:31:34.400 of all the worries you can have, that's a relatively 0:31:35.040 --> 0:31:35.640 small one. 0:31:35.800 --> 0:31:39.000 We went through that with Michael Boskin already rejiggered how 0:31:39.040 --> 0:31:42.160 we calculate, right, of course, the living adjustments. Rather than 0:31:42.920 --> 0:31:46.880 debating this like adults politically, they just made some I'm 0:31:46.920 --> 0:31:50.320 not a big fan of substitution or hedonic adjustment. When 0:31:50.520 --> 0:31:55.760 when steak gets too pricey and you substitute chicken, that 0:31:55.920 --> 0:31:58.360 just means I've been priced out of steak. Not that 0:31:58.440 --> 0:31:58.840 this is. 0:31:58.760 --> 0:32:01.800 The equivalent, Yeah, exactly, I mean it is. It is 0:32:01.840 --> 0:32:06.320 a problem. But of all of the asset classes that 0:32:06.400 --> 0:32:10.240 protect you with the greatest charity against the decrement in 0:32:10.320 --> 0:32:13.800 your future consumption, loss of your future consumption, tips do 0:32:13.840 --> 0:32:15.719 it better than anything else I can think of. All. 0:32:15.800 --> 0:32:18.240 Right, stock, really interesting stocks. 0:32:18.600 --> 0:32:21.920 Do a relatively good job of it. You know. Elroy 0:32:22.000 --> 0:32:24.040 Dimson likes to point out that stocks are an inflation 0:32:24.160 --> 0:32:27.400 head simply because of their high returns, but they're also 0:32:27.400 --> 0:32:31.720 a claim when real assets. You know, companies own real estate, 0:32:31.760 --> 0:32:35.040 they own equipment, they have human capital, and those retain 0:32:35.240 --> 0:32:36.040 real value. 0:32:36.360 --> 0:32:42.480 Plus stocks are their revenue and profits are in dollars, 0:32:42.760 --> 0:32:45.640 so at least in the US, so if there's inflation, 0:32:46.480 --> 0:32:49.280 the cost of their goods go up and their total dollars, 0:32:49.600 --> 0:32:52.680 maybe their profits get squeezed, but everything seems to rise 0:32:53.040 --> 0:32:56.040 in an inflationary environment on the equity side, right. 0:32:55.920 --> 0:32:58.160 Right, And then there's certain kinds of stocks that are 0:32:58.280 --> 0:33:01.600 especially good at protecting you inst inflation. Value stocks do 0:33:02.160 --> 0:33:06.240 why because they tend to be overly leveraged, and with inflation, 0:33:06.520 --> 0:33:10.520 their debts tend to get inflated away and so that 0:33:10.560 --> 0:33:12.960 flows to their bottom line. So if you look, for example, 0:33:12.960 --> 0:33:15.560 at the period that we just talked about from sixty 0:33:15.600 --> 0:33:19.960 six to eighty two, value stocks actually perform the market 0:33:20.040 --> 0:33:24.760 by an inflation by a very good margin. And then finally, 0:33:24.760 --> 0:33:30.080 there are commodities producers in an inflation environment, the petroleum stocks, 0:33:30.160 --> 0:33:34.360 gold stocks, base metal producers are all going to do 0:33:34.840 --> 0:33:39.040 fairly well, at least relatively well to the market. And 0:33:39.080 --> 0:33:41.800 then finally, you know, on the bond side, for God's sakes, 0:33:42.320 --> 0:33:45.400 keep your maturity short. As we found out in twenty. 0:33:45.120 --> 0:33:48.040 Two, I noticed when you talked about real assets, you 0:33:48.080 --> 0:33:51.960 did not discuss real property. How does real property do 0:33:52.080 --> 0:33:54.520 as an inflation hedge over time? 0:33:54.880 --> 0:33:57.000 It's pretty good. But what I like to say about 0:33:57.200 --> 0:33:59.920 real estate is that it's not an investment. It's a job. 0:34:00.440 --> 0:34:00.640 Yeah. 0:34:00.760 --> 0:34:03.200 If you, if you, if you, if you enjoy dealing 0:34:03.200 --> 0:34:07.760 with drug addle tenants and fixing toilets, then be my guest. 0:34:08.640 --> 0:34:12.040 Okay, I wasn't. I wasn't thinking of rental properties. I 0:34:12.200 --> 0:34:16.040 was thinking of the various roots and offices and paying 0:34:16.080 --> 0:34:19.600 a professional to manage it. So you're not getting the 0:34:19.680 --> 0:34:21.760 two am call that the toilet is overflow. 0:34:21.840 --> 0:34:23.719 Yeah, but then by the time you're investing in public reads, 0:34:23.760 --> 0:34:25.400 you're back in the stock market again. 0:34:25.200 --> 0:34:29.719 Right, So there's no difference. Really really really really interesting. 0:34:30.120 --> 0:34:33.120 I was kind of fascinated by a data point you 0:34:33.239 --> 0:34:37.959 shared talking about old Master paintings. Imagine if you bought 0:34:37.960 --> 0:34:42.400 a Rembrandt for one hundred bucks, and three hundred and 0:34:42.440 --> 0:34:45.280 fifty years later you sold it for ten million dollars 0:34:45.840 --> 0:34:48.239 the return was a little over three percent a year. 0:34:48.760 --> 0:34:53.840 That that's astonishing. All these paintings look like they've appreciated 0:34:53.920 --> 0:34:58.960 so much. Tell us about the math behind these paintings 0:34:58.960 --> 0:35:01.000 that go for ten twenty thirty million dollars. 0:35:01.480 --> 0:35:04.600 Well, it's really it's really not about finance or math. 0:35:04.719 --> 0:35:08.799 What it's about is human neuropsychology. We are particularly bad 0:35:08.840 --> 0:35:12.600 at exponential calculations. And you know, it's the old thing 0:35:12.600 --> 0:35:15.400 that even the the they knew back in the in 0:35:15.440 --> 0:35:19.880 the Far East, that you know, the emperor asks the 0:35:20.000 --> 0:35:22.799 artisan or the farmer what he wants. We'll put one 0:35:22.840 --> 0:35:25.200 grain of rice on the first square in the of 0:35:25.239 --> 0:35:27.200 the chessboard. And by the time you get, of course 0:35:27.239 --> 0:35:29.560 to the to the square, but by the time you 0:35:29.600 --> 0:35:31.960 get to the sixty fourth square, he's the wealthiest person 0:35:32.640 --> 0:35:35.520 on the planet. Human beings are not good at that. 0:35:35.600 --> 0:35:38.239 And that's all that. That's a demonstration of. Now, if 0:35:38.239 --> 0:35:42.280 you want to get into the academic finance of it, 0:35:42.280 --> 0:35:47.800 it's that art has value in investment, has investment value, 0:35:47.800 --> 0:35:50.719 but it also has a complementary value, which is a 0:35:50.800 --> 0:35:55.680 syesthetic return. And Bill Bommel did the research on this, 0:35:55.760 --> 0:35:58.719 the late Bill Bommel. Then Yu did the research on 0:35:58.760 --> 0:36:02.040 this and figured out out that art had a much 0:36:02.280 --> 0:36:06.879 lower return than stocks or bonds simply because of its 0:36:07.080 --> 0:36:08.200 esthetic return. 0:36:08.880 --> 0:36:10.839 Makes a lot of sense. And that's before we get 0:36:10.880 --> 0:36:14.839 to the whole survivorship bias that you only see the 0:36:14.880 --> 0:36:18.120 most famous paintings in the world and their price tag. 0:36:18.600 --> 0:36:21.800 The tens of thousands of other paintings that aren't auctioned 0:36:21.840 --> 0:36:24.840 off each year, we don't see their returns. 0:36:24.440 --> 0:36:27.359 So to say nothing of the maintenance and insurance and 0:36:27.400 --> 0:36:30.160 security costs of keeping the art as well. 0:36:30.760 --> 0:36:33.600 No doubt, no doubt about that. It's funny because you 0:36:33.600 --> 0:36:37.160 have this whole group of investing books and then you 0:36:37.239 --> 0:36:41.840 also have this separate group of really fascinating historical books 0:36:41.880 --> 0:36:47.000 about markets and the economy and global trade. Let's start 0:36:47.000 --> 0:36:52.680 with the splendid exchange. It's so perfect for the moment 0:36:52.800 --> 0:36:57.399 we're in. What is the history of trade and how 0:36:57.480 --> 0:37:00.960 has it helped raise everybody standard of living? 0:37:01.520 --> 0:37:05.880 Well, it just gets down to Adam Smith's concept of specialization. 0:37:06.120 --> 0:37:12.200 Nations specialize, and nations have and people have an intrinsic 0:37:12.960 --> 0:37:15.600 tendency too, as he put it, truck and barter. They 0:37:15.600 --> 0:37:19.400 want to trade one thing for another. So you know, 0:37:19.440 --> 0:37:22.840 the one of the great luxury commodities of the seventeenth 0:37:22.920 --> 0:37:25.240 century was the pineapple. If you look at the coats 0:37:25.280 --> 0:37:28.680 of arms of all these European aristocrats, about third or 0:37:28.680 --> 0:37:30.680 a quarter of them have a pineapple on them. Why 0:37:30.760 --> 0:37:33.040 because they came from the New World. They were incredibly 0:37:33.120 --> 0:37:38.799 precious and they were delicious. Everybody in Europe wanted a 0:37:38.840 --> 0:37:43.719 pineapple because they don't grow pineapples in Europe. And so 0:37:44.080 --> 0:37:52.200 different nations have different geographical and intellectual and technological endowments. 0:37:52.280 --> 0:37:55.760 And it's if you improve everybody's standard of living by 0:37:55.880 --> 0:37:58.640 trading among nations the things that other nations aren't good at. 0:38:00.160 --> 0:38:03.040 That seems fair. And we all specialize and we all 0:38:03.080 --> 0:38:06.840 do different things. It makes sense as the US developed 0:38:06.880 --> 0:38:10.479 computer technology and software that we're not going to make 0:38:10.680 --> 0:38:15.400 furniture or fabrics or sneakers or those sorts of things. 0:38:16.080 --> 0:38:19.680 But at what point does globalization go too far? At 0:38:19.719 --> 0:38:23.319 what point have we hollowed out the middle class by 0:38:23.400 --> 0:38:28.000 outsourcing manufacturing to China and other low cost countries. 0:38:28.280 --> 0:38:30.759 That's a really good question, and it was highlighted by 0:38:30.800 --> 0:38:34.080 a series of patients. Again, it was highlighted by a 0:38:34.120 --> 0:38:37.840 series of papers by an economist named David Otter auto 0:38:38.000 --> 0:38:42.560 R And his colleagues, and it showed just how badly 0:38:43.120 --> 0:38:49.200 communities that were affected by Chinese competition were hollowed hollowed out. Now, 0:38:49.400 --> 0:38:53.399 the problem with free trade is that its harms are 0:38:53.440 --> 0:38:57.319 concentrated and obvious, as David Order found out, but its 0:38:57.320 --> 0:39:01.279 benefits are diffuse. So a world in which we have 0:39:01.320 --> 0:39:03.880 to make our own shirts and our own furniture is 0:39:03.920 --> 0:39:07.520 a world in which the other three hundred and fifty 0:39:07.560 --> 0:39:11.640 million Americans who don't make those things are taxed very heavily. 0:39:11.680 --> 0:39:13.799 So instead of paying fifteen dollars for a shirt, you're 0:39:13.800 --> 0:39:17.240 paying thirty five dollars for a shirt. Instead of paying, 0:39:17.320 --> 0:39:18.799 you know, two and a half dollars for a head 0:39:18.840 --> 0:39:21.760 of lettuce, you've got to pay seven dollars for ahead 0:39:22.160 --> 0:39:24.520 of lettuce. And so that's a world in which everyone 0:39:24.600 --> 0:39:28.239 else is impoverished, but in which those costs are much 0:39:28.239 --> 0:39:31.160 harder to see than the out of work auto worker 0:39:31.400 --> 0:39:33.760 or out of work furniture manufacturer. 0:39:34.360 --> 0:39:39.200 So we certainly have problems in the United States. There's 0:39:39.239 --> 0:39:42.840 wealth inequality, there's income inequality. I think the worst of 0:39:43.560 --> 0:39:48.839 the pandemic inflation is behind us, but we have these 0:39:48.920 --> 0:39:53.960 real problems with which a lot of people are blaming 0:39:54.719 --> 0:39:59.960 on trade and globalization. What's wrong with that thesis. 0:40:00.960 --> 0:40:05.200 The analogy I like to use is Churchill's comment about democracy, 0:40:05.560 --> 0:40:07.799 which is it's the worst form of government that's ever 0:40:07.840 --> 0:40:09.719 been tried, except for all the others that have been 0:40:09.760 --> 0:40:12.239 tried from time to time. I think that's close to 0:40:12.280 --> 0:40:17.680 the exact route. And so the alternative to free trade 0:40:17.719 --> 0:40:22.240 is protectionism, and protectionism, as we found out during the thirties, 0:40:23.280 --> 0:40:27.880 is a disaster in multiple dimensions. What happens when you 0:40:27.960 --> 0:40:31.120 raise tariffs is what we're seeing now, is in the 0:40:31.160 --> 0:40:36.080 first place, prices go up. You know, automakers, automakers have 0:40:36.160 --> 0:40:40.719 to pay more for their steel. You know, people who 0:40:40.760 --> 0:40:43.719 are making agricultural products and processing food have to pay 0:40:43.719 --> 0:40:50.280 more for their imported basic inputs, and so domestic prices 0:40:50.320 --> 0:40:52.520 go up. You get inflation, and we're already starting to 0:40:52.560 --> 0:40:55.600 see the expectation of inflation going up. I think the 0:40:55.640 --> 0:40:58.880 media and expectation is now six point seven percent in 0:40:59.000 --> 0:41:02.680 survey data. And once you see the expectation of inflation 0:41:02.800 --> 0:41:05.160 going up, then inflation goes up, because that's how inflation 0:41:05.560 --> 0:41:10.320 is driven. Then you see retaliation, which we're already seeing 0:41:10.800 --> 0:41:14.640 in spectacular fashion, and you see trade wars. But that 0:41:15.120 --> 0:41:19.000 is not even the worst costs cost of protectionism, because 0:41:19.040 --> 0:41:23.319 what happens with that is that it inflames international relations. 0:41:23.920 --> 0:41:28.600 And it was apparent to people in nineteen forty five 0:41:29.120 --> 0:41:31.680 that one of the causes of the Second World War 0:41:32.640 --> 0:41:37.439 was the protectionism of the nineteen thirties, and that gave 0:41:37.600 --> 0:41:42.320 rise to the new world order that we put in place. 0:41:42.320 --> 0:41:45.799 Basically in nineteen forty five, you know, with the what 0:41:46.040 --> 0:41:48.800 came in what became the World Trade Organization, the IMF 0:41:49.760 --> 0:41:54.680 and Breton Woods, and they said, never, never again, this 0:41:54.760 --> 0:41:57.360 is never going to happen again. Why did the Japanese 0:41:57.360 --> 0:41:59.800 attack Pearl Harbor r It was because we embargoed oil, 0:42:00.600 --> 0:42:03.440 all right, and they knew what would happen if we 0:42:03.560 --> 0:42:07.120 cut off their oil supplies. And I fear the same 0:42:07.160 --> 0:42:11.200 thing would happen today. Imagine, for example, an inverted naval 0:42:11.280 --> 0:42:14.640 encounter in the Straits of Taiwan between US and Japanese 0:42:15.200 --> 0:42:18.879 naval vessels. The difference between a peaceful and a non 0:42:18.920 --> 0:42:21.920 peaceful outcome may very well be the state of mind 0:42:22.360 --> 0:42:27.560 of the policymakers on both sides, whose emotions have been 0:42:27.560 --> 0:42:29.400 inflamed by the trade RUCKUS. 0:42:29.920 --> 0:42:35.920 Huh really interesting. So PAX Americana eighty years of growth 0:42:35.960 --> 0:42:42.600 and economic success, much of which accrued to the benefit 0:42:42.640 --> 0:42:46.799 of the US. Are you implying that that is now 0:42:46.840 --> 0:42:47.239 at risk? 0:42:47.640 --> 0:42:51.560 Yes. Absolutely. There is a man, very fairly well known 0:42:51.600 --> 0:42:54.600 economists by the name of Albert Hirshman, who has a 0:42:54.600 --> 0:42:58.680 fascinating biography. He was Jewish, he was raised in Berlin. 0:43:00.280 --> 0:43:02.560 Not only was he Jewish, but he was also a socialist. 0:43:03.560 --> 0:43:07.360 So he fled the Nazi persecution, fought in the French 0:43:07.440 --> 0:43:10.320 army against the Germans, then wound up in Marseille, spiriting 0:43:10.360 --> 0:43:16.000 people like Hannah Arendt out of Marseille into the United 0:43:16.600 --> 0:43:21.879 into the United States. And he saw quite clearly that 0:43:22.120 --> 0:43:26.600 World War II was enlarged part triggered by the trade 0:43:26.760 --> 0:43:30.400 frictions of that period. For example, you know, one of 0:43:30.440 --> 0:43:32.479 the things that inflamed the Germans so much was because 0:43:32.520 --> 0:43:34.480 they couldn't pay their way out of the World War 0:43:34.520 --> 0:43:36.520 One reparations, because they couldn't export. 0:43:37.760 --> 0:43:41.680 And Lord quad Amat's book goes into great detail about that. 0:43:41.760 --> 0:43:45.080 Yeah, and so he wrote about that in nineteen forty five, 0:43:45.120 --> 0:43:47.399 and he says, we have to establish a world order 0:43:47.400 --> 0:43:48.680 in which that doesn't happen again. 0:43:49.200 --> 0:43:52.600 Huh. So here's the best case scenario. And I want 0:43:52.600 --> 0:43:55.440 to talk a little bit about this because splendid Exchange 0:43:55.480 --> 0:43:57.759 and Birth of plenty are sort of two sides of 0:43:57.800 --> 0:44:02.319 the same coin. Best case scenario, this is just a 0:44:02.360 --> 0:44:05.840 negotiating tactic. We're going to cut all these side deals 0:44:06.200 --> 0:44:09.320 and all this brew Haha, Hey, you took him literally, 0:44:09.360 --> 0:44:12.400 we should have taken him seriously. Is there a way 0:44:12.480 --> 0:44:17.640 out that doesn't destroy the post World War two order 0:44:17.719 --> 0:44:21.480 that has accrued so much wealth to the United States? 0:44:21.760 --> 0:44:24.840 It is possible. I don't think at this point it 0:44:24.920 --> 0:44:28.200 is probable. I think that so much damage has been done. 0:44:28.680 --> 0:44:32.680 I don't think that any any foreign power is ever 0:44:32.719 --> 0:44:37.760 going to trust us again. You know, Donald Trump renegotiates 0:44:37.840 --> 0:44:42.120 andn after we get the USMCA. 0:44:41.920 --> 0:44:45.560 His new treaty in Trump one, in Trump one. 0:44:45.480 --> 0:44:48.759 And then he repudiates that. And you know, let's say 0:44:48.760 --> 0:44:53.719 that the Democrat gets elected into in twenty twenty eight. 0:44:53.800 --> 0:44:56.080 Let's assume that you know that he not only he 0:44:56.200 --> 0:44:59.000 or she not only gets the presidency but also gets 0:44:59.000 --> 0:45:03.359 a democratically dominated Congress. The other nations of the world 0:45:03.360 --> 0:45:04.640 are going to look at us and say, yeah, but 0:45:04.680 --> 0:45:06.400 we don't know who's going to be elected in twenty 0:45:06.400 --> 0:45:08.640 thirty two or twenty thirty six. We can't trust these 0:45:08.640 --> 0:45:09.279 people ever. 0:45:09.400 --> 0:45:12.640 Again, that sounds like a worst case scenario. 0:45:12.960 --> 0:45:14.680 I think that's the most I don't think that's the 0:45:14.719 --> 0:45:17.200 worst case scenario. I can think of worst case scenarios 0:45:17.280 --> 0:45:19.440 than that which I've just I described previous to that 0:45:19.520 --> 0:45:22.160 in front of geopolitics, But I think that's the most 0:45:22.200 --> 0:45:24.960 probable scenario. I don't think that anyone is ever going 0:45:25.000 --> 0:45:26.400 to trust the United States again. 0:45:27.320 --> 0:45:30.480 So I'm an optimist because I was fortunate to be 0:45:30.680 --> 0:45:33.720 born when I was where I was, into the family 0:45:33.800 --> 0:45:36.680 I was. I know that shapes how I see the world. 0:45:37.239 --> 0:45:42.240 I'm kind of hopeful that the twenty twenty six Congress 0:45:42.320 --> 0:45:46.800 changes hands, the tariff power is retaken back by Congress, 0:45:46.880 --> 0:45:49.880 which is within their authority to do, and that whoever 0:45:50.000 --> 0:45:53.440 gets elected in twenty eight, regardless of which side of 0:45:53.440 --> 0:45:57.759 the aisle, just does a global goodwill tour and kind 0:45:57.840 --> 0:46:00.959 of rolls back the past four years. Am I being 0:46:01.400 --> 0:46:06.319 pollyannish about this? Am I too sanguine about the potential 0:46:06.440 --> 0:46:10.839 to repair the worst damage that you're suggesting? 0:46:11.120 --> 0:46:14.520 Well, you and I are engaging in a forecasting exercise. 0:46:14.560 --> 0:46:18.240 Which is well beyond computational impass Human beings, as Philip 0:46:18.280 --> 0:46:22.000 Tatlock described, don't forecast very well, even even the best experts. 0:46:23.000 --> 0:46:26.120 My judgment, my forecast would be that your scenario is 0:46:26.200 --> 0:46:30.400 possible but less probable than mine. But I wouldn't be surprised, 0:46:30.440 --> 0:46:34.200 and I would hope that you're right. But if you 0:46:34.640 --> 0:46:37.560 want a worst case scenario, which I think is as 0:46:37.640 --> 0:46:43.080 probable as yours, the current ructions trashing the treasury market, 0:46:43.080 --> 0:46:46.800 I see rates rising, and I see us falling into 0:46:47.680 --> 0:46:49.719 a debt spiral, and away we go. 0:46:50.640 --> 0:46:54.640 So Ben Hunt of Epsilon Theory wrote a piece a 0:46:54.680 --> 0:46:58.440 week or two ago called the car Crash of Pak's 0:46:58.480 --> 0:47:03.080 Americana and lays out that exact case. Nobody wants to 0:47:03.080 --> 0:47:05.319 buy our treasuries, so how do we finance our debt? 0:47:05.760 --> 0:47:09.440 The dollar, our exorbitant privilege, The dollar as the world's 0:47:09.480 --> 0:47:14.200 reserve currency, is replaced with a basket of euro, yen, wan, 0:47:14.400 --> 0:47:19.600 things like that, and people just start to realize how 0:47:19.600 --> 0:47:23.680 good they had it and frittered it away on a 0:47:23.800 --> 0:47:27.000 very ill advised policy that the last time we tried 0:47:27.040 --> 0:47:32.400 it in nineteen thirty, Smooth Hawley didn't work out well. Either. 0:47:32.800 --> 0:47:36.319 So if that's the case, why would I want to 0:47:36.360 --> 0:47:40.440 own a dollar denominated US assets? Isn't that an argument 0:47:40.520 --> 0:47:42.200 for head for the hills? 0:47:42.560 --> 0:47:47.120 Why? Indeed, and that is certainly an argument for international diversification. 0:47:47.719 --> 0:47:50.680 To invest in countries whose economies are run by adults. 0:47:51.560 --> 0:47:54.760 So once you buy it, the exchange rate no longer matters. 0:47:54.760 --> 0:47:59.680 If you're purchasing Europe, and if you're purchasing Japan or 0:47:59.719 --> 0:48:03.320 in or wherever, and there is inflation in the US 0:48:03.360 --> 0:48:06.480 and there is a decrease in the value of the dollar, 0:48:07.080 --> 0:48:09.000 it doesn't matter after you've made the purchase. 0:48:09.440 --> 0:48:12.400 Yeah, there will be damage on a global scale no 0:48:12.440 --> 0:48:14.880 matter where you invest, but you will mitigate the damage 0:48:15.200 --> 0:48:19.120 by investing abroad. That's the argument for international diversification. It 0:48:19.160 --> 0:48:21.440 hasn't had a lot of fans the past fifteen years, 0:48:21.880 --> 0:48:23.960 but it's coming back into fashion. 0:48:24.719 --> 0:48:29.600 So yeah, No, you've definitely seen this year to date overseas, 0:48:29.680 --> 0:48:33.200 especially Europe and even some of the emerging markets start 0:48:33.239 --> 0:48:36.600 to do much better than they have. What's fascinating about 0:48:36.680 --> 0:48:42.200 splendid exchange is you trace the rise of trade and 0:48:42.239 --> 0:48:47.120 the benefits of an interrelated economy back to the plague, 0:48:47.160 --> 0:48:51.359 the Black Death tell us how the plague led to 0:48:52.480 --> 0:48:53.920 changing up trading patterns. 0:48:54.160 --> 0:49:00.359 Well, it's a fairly well established economic historical subject, which 0:49:00.400 --> 0:49:02.920 is that what the plague did is it overvalued labor. 0:49:03.600 --> 0:49:05.960 A third half of the population of Europe disappeared, and 0:49:06.000 --> 0:49:10.680 so that greatly empowered workers. It drove prosperity, and it 0:49:10.719 --> 0:49:14.239 also probably you know, a century a century and a 0:49:14.239 --> 0:49:18.960 half later, drove the voyages of discovery to the Indies. 0:49:18.960 --> 0:49:21.040 What were people looking for in the Indies. Well, they 0:49:21.040 --> 0:49:25.160 were looking for this really important economic commodity, which was nutmeg, 0:49:25.200 --> 0:49:29.319 mace and clothes, which were great luxuries, and it's what 0:49:29.440 --> 0:49:32.160 made Portugal wealthy early on, and then drove the wealth 0:49:32.320 --> 0:49:35.520 of the Dutch and then finally the English. 0:49:36.120 --> 0:49:40.359 Huh, that's really interesting. So one of the things you 0:49:40.400 --> 0:49:44.319 wrote in Exploded Exchange is trade almost always benefits the 0:49:44.440 --> 0:49:47.799 nations that engage in it, but only averaged over the 0:49:47.920 --> 0:49:52.160 entire national economy. There's always a minority that is hurt 0:49:52.200 --> 0:49:56.920 by evolving trade patterns, and they always call for protection. 0:49:57.480 --> 0:50:01.520 That was very pressing in observation. Is that coming true 0:50:01.560 --> 0:50:04.440 now in what you see for the people who are 0:50:04.480 --> 0:50:10.560 demanding protection from international trade and globalization in the current administration. 0:50:10.880 --> 0:50:16.160 Yeah, when when trade opens up, then someone is hurt. 0:50:16.280 --> 0:50:19.480 If you're making furniture in the United States and people 0:50:19.560 --> 0:50:25.040 in China can make it more cheaply then you can, 0:50:25.239 --> 0:50:28.640 then you're going to be hurt as a furniture maker. 0:50:28.680 --> 0:50:30.680 On the other hand, if you're a consumer of furniture 0:50:30.960 --> 0:50:34.520 and there are you know, thousands and thousand times more 0:50:34.640 --> 0:50:37.279 consumers of furniture than there are makers furniture, then you 0:50:37.440 --> 0:50:43.200 benefit greatly from that. But trade always produces losers and winners. 0:50:43.239 --> 0:50:45.440 Now is part of the fun of writing Splendid Exchange 0:50:45.480 --> 0:50:48.640 was identifying who the losers were three and four hundred 0:50:48.719 --> 0:50:51.200 years ago, and two hundred years ago, and one hundred 0:50:51.320 --> 0:50:54.040 years ago, four hundred years ago, the big losers with 0:50:54.160 --> 0:50:56.840 trade were the people who grew sugar on the island 0:50:56.880 --> 0:51:00.520 of Madeira, which was a sugar producing eye and from 0:51:00.520 --> 0:51:04.360 about the fifteenth century or actually the fourteenth century on, 0:51:04.600 --> 0:51:07.320 and they made a lot of money until people started 0:51:07.320 --> 0:51:10.920 growing sugar in the Caribbean and in Brazil and Madeir 0:51:10.960 --> 0:51:14.440 and sugar producers got clobbered. And did they demand and 0:51:15.000 --> 0:51:18.000 get protection, Yes, they did because they were losers in 0:51:18.040 --> 0:51:21.880 the system. And in the nineteenth century the big losers, 0:51:22.000 --> 0:51:24.959 and they drove a protection as you still see today, 0:51:24.960 --> 0:51:28.440 were European farmers, and was all the fault of Henry Bessemer, 0:51:28.760 --> 0:51:33.480 who learns how to produce or develops a process for 0:51:33.520 --> 0:51:37.520 producing high quality steel which goes into steel rails, which 0:51:37.640 --> 0:51:41.440 enables the grain exporters of the American Midwest and of 0:51:41.600 --> 0:51:46.200 Argentina and of the Ukraine to export vast quantities of 0:51:46.440 --> 0:51:52.080 cheap grain, which bankrupted European farmers who demanded and got protection, 0:51:52.200 --> 0:51:54.879 and they have protection even to this day because of that. 0:51:55.480 --> 0:51:58.600 And then let's talk about the birth of plenty. What 0:51:58.880 --> 0:52:02.799 is the relationship of trade to all the abundance that 0:52:02.800 --> 0:52:05.600 we seem to be enjoying, or at least up until recently. 0:52:06.160 --> 0:52:09.800 Well, yeah, it's the same basic thing. It's the ability 0:52:09.880 --> 0:52:14.160 to purchase things more cheaply than would be available to 0:52:14.239 --> 0:52:18.960 be available to you from domestic producers. It's that simple. 0:52:19.000 --> 0:52:21.960 The birth of plenty was really, really though about the 0:52:22.080 --> 0:52:27.200 four basic preconditions for strong economic growth, which are property 0:52:27.280 --> 0:52:32.920 rights and capital markets and scientific rationalism and modern transport 0:52:32.960 --> 0:52:36.480 and communications systems. And so it's not until you see 0:52:36.520 --> 0:52:38.839 those four things come together that you see the sort 0:52:38.880 --> 0:52:42.680 of modern economic growth that's really only been present for 0:52:42.719 --> 0:52:45.840 the past two hundred years. It really wasn't until relatively 0:52:45.880 --> 0:52:48.120 early in the nineteenth century that this idea that the 0:52:48.120 --> 0:52:51.400 economy grew per capita GDP grew at one or two 0:52:51.440 --> 0:52:54.960 percent per year became a reality. Before eighteen hundred, per 0:52:54.960 --> 0:52:56.799 capita GDP growth was zero. 0:52:57.280 --> 0:53:01.240 Wow, that's amazing. So before we get to our speed round, 0:53:01.719 --> 0:53:04.440 let's talk about your next book. What are you writing now? 0:53:04.480 --> 0:53:05.239 What are you working on? 0:53:06.960 --> 0:53:08.840 I'm still working on it, and whether or not I 0:53:08.840 --> 0:53:13.319 get a publisher for it is open to question. I'm 0:53:13.520 --> 0:53:18.640 interested in two basic subjects. One is the radius of 0:53:18.680 --> 0:53:23.000 trust and societal radius of trust that feeds into the 0:53:23.000 --> 0:53:27.879 strength of institution's rule of law property rights. Why did 0:53:27.960 --> 0:53:31.799 modern prosperity or prosperity of the modern sort arise in 0:53:31.840 --> 0:53:36.120 Northern Europe and England, and in Scandinavia and in Germany 0:53:36.120 --> 0:53:39.880 Weltz because those societies have high radiuses of trust. You 0:53:39.960 --> 0:53:42.319 tend to trust strangers, and the origins of that are 0:53:42.719 --> 0:53:47.000 just extremely, extremely interesting, having to do with prohibitions on 0:53:47.120 --> 0:53:50.800 cousin marriage. It's way too complicated to get into. And 0:53:50.840 --> 0:53:53.560 then the other subject that I'd love to write about 0:53:53.640 --> 0:53:56.760 is something that I call the paradox of religion, which 0:53:56.840 --> 0:54:00.239 is that it is very well established that religiosity is 0:54:00.320 --> 0:54:04.560 beneficial to the individual. People who are religious live longer, 0:54:05.760 --> 0:54:09.799 they are healthier psychologically, they have better social connections, They're 0:54:09.800 --> 0:54:12.960 healthier and happier in every way you'd want to measure. 0:54:13.400 --> 0:54:15.480 On the other hand, when you look at the national level, 0:54:15.680 --> 0:54:20.440 religiosity is inversely correlated with the health of a society. 0:54:20.800 --> 0:54:25.080 So you know, obviously the most religious places on Earth, Somalia, 0:54:25.200 --> 0:54:29.120 the Indian subcontinent, you know, sub Saharan Africa, are also 0:54:29.160 --> 0:54:33.040 the poorest nations on Earth. The richest nations on Earth 0:54:33.080 --> 0:54:36.080 are the ones that are the least religious. What I 0:54:36.120 --> 0:54:37.840 like to talk about is what I call the Somalia 0:54:37.880 --> 0:54:42.560 Sweden scale of religiosity. And there's a concept in economics 0:54:43.239 --> 0:54:46.319 called the paradox of thrift which we're all familiar with, 0:54:46.360 --> 0:54:48.640 which is thrift is good for the individual, it's bad 0:54:48.680 --> 0:54:53.839 for the society. And what you see with religion is 0:54:54.000 --> 0:54:57.279 that it's the same way. Religion is good for the individual, 0:54:57.760 --> 0:55:02.400 but religion is bad for the society overall for obvious reasons. 0:55:02.440 --> 0:55:03.520 You get religious conflict. 0:55:04.080 --> 0:55:08.160 Well, well, let's break that down my savings, my thrift 0:55:08.880 --> 0:55:12.759 is your laws sales, So that's pretty easy to into it. 0:55:13.480 --> 0:55:18.680 Why would my improved psychology and happiness and whatever you, 0:55:18.920 --> 0:55:23.160 as a religious person, end up making the whole country 0:55:24.360 --> 0:55:27.440 more poor less wealthy if everybody's. 0:55:26.920 --> 0:55:33.680 Religious, because because it accentuates religious difference, religious and personal differences. 0:55:34.400 --> 0:55:36.640 If you are deeply religious, you tend to be more 0:55:36.880 --> 0:55:41.880 distrustful of people of different religions. So the societal radius 0:55:41.880 --> 0:55:45.520 of trust is highest in the least religious societies because 0:55:45.520 --> 0:55:47.400 there's less reason for personal conflict. 0:55:48.040 --> 0:55:51.960 And tell us about what is this radius of trust 0:55:52.120 --> 0:55:55.200 you keep referring to give us a little flesh that 0:55:55.239 --> 0:55:55.879 out if you would. 0:55:56.520 --> 0:55:58.560 Well, the best example I can think of, sort of 0:55:58.560 --> 0:56:03.440 the most pungent example is what Jared Diamond talks about 0:56:03.600 --> 0:56:06.319 in his field work in New Guinea, which is that 0:56:06.400 --> 0:56:11.520 when two New Guinea highlanders from different valleys meet, the 0:56:11.560 --> 0:56:14.759 first thing they do is they try and figure out 0:56:14.760 --> 0:56:17.279 how they're related. Okay, do you know this person you 0:56:17.400 --> 0:56:21.760 that person, this person your call that Jewish geography judar. Yes, 0:56:22.120 --> 0:56:25.080 and so you figure that out, and the first person 0:56:25.200 --> 0:56:27.759 figures out, oh my god, this person on the other 0:56:28.080 --> 0:56:31.920 side of me doesn't know anything about me, turns around 0:56:31.920 --> 0:56:33.920 and runs like hell because he knows if the other 0:56:33.920 --> 0:56:36.600 person figures that out, he's going to try and kill him. Okay, 0:56:36.920 --> 0:56:39.759 So this is a society where where people are so 0:56:39.880 --> 0:56:43.800 mistrustful of people from different tribes that murder is often 0:56:44.120 --> 0:56:48.640 the result. All right. Now, in Western societies, you get 0:56:48.680 --> 0:56:50.920 at it by what's called the trust question, which is, 0:56:51.080 --> 0:56:54.640 and it's a very very very common question in sociological surveys, 0:56:54.680 --> 0:56:57.120 which is, do you generally believe that other people can 0:56:57.200 --> 0:56:59.719 be trusted or do you endorse the statement that you 0:56:59.760 --> 0:57:02.319 can be too careful about who you trust? And you 0:57:02.320 --> 0:57:06.480 can measure societal radius of trust that way. And a 0:57:06.480 --> 0:57:10.560 society in which people say, yes, most people can be 0:57:10.600 --> 0:57:13.120 trusted and very few people say you can't be too 0:57:13.160 --> 0:57:16.880 trusting of people, those tend to be much wealthier places. Okay. 0:57:16.920 --> 0:57:18.680 Those are the places where you leave your wallet on 0:57:18.720 --> 0:57:21.160 the sidewalk by mistake and it gets returned to you. 0:57:21.200 --> 0:57:24.720 Sure, Japan is notorious for that sort of thing exactly. 0:57:24.800 --> 0:57:29.200 So let me ask you an odd question. Can both 0:57:29.240 --> 0:57:31.960 of those things be true at once? 0:57:32.120 --> 0:57:32.520 Can you? 0:57:33.160 --> 0:57:37.560 Hey, we're social primates. This is how we evolved and adapted, 0:57:38.000 --> 0:57:41.360 and so we want to cooperate, but maybe we need 0:57:41.400 --> 0:57:43.960 to be a little less gullible about people selling us 0:57:44.040 --> 0:57:47.760 crappy financial products. Are those two things compatible? 0:57:48.800 --> 0:57:51.560 Yeah, I mean there certainly are exceptions. No matter how 0:57:51.600 --> 0:57:57.480 trusting you are, you have to be very suspicious of 0:57:57.480 --> 0:58:00.640 the people who calls you from a non identified phone number. 0:58:01.800 --> 0:58:04.080 Really interesting, even if you're. 0:58:03.920 --> 0:58:06.440 A trusting Midwesterner from Peoria, you still have to have 0:58:06.480 --> 0:58:07.120 your guard up. 0:58:08.120 --> 0:58:10.439 So I only have you for a short period of time, 0:58:10.480 --> 0:58:13.600 and you've done the favorite question so many times, I 0:58:13.640 --> 0:58:16.560 feel like they're redundant. So rather than go through all 0:58:16.600 --> 0:58:19.680 of those, I just want to ask you, tell us 0:58:19.680 --> 0:58:23.000 what you're reading now, what are some of your favorite books? 0:58:23.000 --> 0:58:25.560 And what's keeping you occupied right here and now? 0:58:26.200 --> 0:58:28.160 Well, the person I think who I've read more of 0:58:28.200 --> 0:58:30.600 in the past year than anyone else is a man 0:58:30.640 --> 0:58:35.280 by the name of Robin Gunbar who is an evolutionary 0:58:37.280 --> 0:58:44.000 psychologist and an evolutionary biologist at Oxford. And what he 0:58:44.040 --> 0:58:47.800 did was he figured out that the size of primate 0:58:47.880 --> 0:58:51.000 social groups was directly related to the size that basically, 0:58:51.040 --> 0:58:54.440 the size of their brains the size of their neocortexes. 0:58:54.240 --> 0:58:58.880 Meaning the more the larger your evolutionary brain has developed 0:58:59.320 --> 0:59:02.320 the biggest circle of friends you could keep clear in 0:59:02.000 --> 0:59:07.439 your head. We're talking primates up to and including humans. 0:59:07.120 --> 0:59:09.520 Is that right, Well, yeah, up to and including humans. 0:59:09.560 --> 0:59:09.720 Now. 0:59:09.840 --> 0:59:13.440 Dunbar's number for human beings who have the largest neocortex 0:59:13.560 --> 0:59:15.840 is the largest brain sizes, if you will, it is 0:59:15.840 --> 0:59:19.280 about one hundred and fifty all right, And so you 0:59:19.320 --> 0:59:21.640 and I can keep about one hundred and fifty people 0:59:21.800 --> 0:59:24.040 straight and be able to read them and be able 0:59:24.080 --> 0:59:27.040 to interact with them and have a good social and 0:59:27.080 --> 0:59:33.360 trusting social relationship with them. And that's the natural size 0:59:33.360 --> 0:59:35.720 of a human band. So for example, when you look 0:59:35.720 --> 0:59:40.240 at church congregations, when a church congregation gets to be 0:59:40.240 --> 0:59:43.080 beyond one hundred and fifty, say towards two hundred, towards 0:59:43.120 --> 0:59:45.280 two hundred or two hundred and fifty people, it splits 0:59:45.640 --> 0:59:48.440 because the group can't cohere, it can't keep itself, it 0:59:48.440 --> 0:59:52.320 can't keep itself together. What is the basic military unit 0:59:52.360 --> 0:59:54.520 that you see around the world in all militaries, Well, 0:59:54.520 --> 0:59:56.960 it's the company. Okay, that's one hundred and twenty, one 0:59:57.040 --> 1:00:03.160 hundred and forty soldiers. That's dune Bars number. And chimpanzees 1:00:03.200 --> 1:00:05.160 have a Dunbar's number because they have smaller brains of 1:00:05.160 --> 1:00:08.040 about fifty that's the size of a chimpanzee tribe or 1:00:08.080 --> 1:00:11.760 a chimpanzee clan. Lemmurs have very small brains. You can't 1:00:11.840 --> 1:00:16.480 keep more than two lemurs together. Really, Yeah, And so 1:00:18.120 --> 1:00:20.680 Dunbar has immersed himself of the world of how we 1:00:20.800 --> 1:00:24.880 keep our social interactions straight, how we juggle them all, 1:00:25.600 --> 1:00:28.400 and how we're able to do it. And it turns out, 1:00:28.520 --> 1:00:30.840 for example, that there are some people who have great 1:00:30.840 --> 1:00:35.640 emotional intelligence who can who probably have Dunbar's number of 1:00:35.640 --> 1:00:37.520 two hundred or two hundred and fifty or three hundred. 1:00:37.680 --> 1:00:40.160 That was probably Bill Clinton. You know, Bill Clinton had 1:00:40.160 --> 1:00:43.200 this ability to read people. When what was said of 1:00:43.240 --> 1:00:45.400 Bill Clinton that you know, when you were talking with him, 1:00:46.480 --> 1:00:48.959 it wasn't just he was taught. He was talking only 1:00:49.000 --> 1:00:51.280 to you. You were the only person in the room, right, 1:00:51.440 --> 1:00:53.960 And that's a person with a high Dunbar's number, also 1:00:54.000 --> 1:00:56.360 with a very high with a very large size to 1:00:56.400 --> 1:01:00.400 full mode network, which we talked about earlier, which is 1:01:00.440 --> 1:01:02.920 the part of your bane that maintains your social intelligence. 1:01:03.360 --> 1:01:06.440 So Dunbar has a series of books out. One is 1:01:06.520 --> 1:01:10.760 called Friends, which I can't recommend highly enough. And then 1:01:10.760 --> 1:01:14.480 the other is called The Evolution of Religion, which has 1:01:14.560 --> 1:01:19.560 to do with with religious groups and how religious groups 1:01:19.600 --> 1:01:21.840 go here, and how it has to do with his 1:01:22.760 --> 1:01:25.960 with his number. Both absolutely, both books are just complete 1:01:25.960 --> 1:01:28.360 and total brain candy feasts. 1:01:28.520 --> 1:01:30.160 Really all right, I'm going to put those on my 1:01:30.240 --> 1:01:30.960 list for sure. 1:01:31.320 --> 1:01:33.080 And and then and then of course the person who 1:01:33.120 --> 1:01:34.480 I you know that the other two people who I 1:01:34.520 --> 1:01:37.800 read read repeatedly, over and over again are Joe Henrik, 1:01:38.440 --> 1:01:43.360 who's the head of theoretical biology at Harvard. He's the 1:01:43.360 --> 1:01:45.320 guy who wrote the weird book you know, w E 1:01:45.440 --> 1:01:49.720 I R D. Oh sure, w I W E I 1:01:49.840 --> 1:01:56.440 R D. Western educated, industrialized, rich and democratic, And it 1:01:56.480 --> 1:01:58.919 turns out that most human societies are not weird, most 1:01:59.000 --> 1:02:01.880 human societies, you're true additional societies, and that we in 1:02:01.920 --> 1:02:03.760 Western societies are the weird ones. 1:02:04.280 --> 1:02:04.440 Huh. 1:02:05.320 --> 1:02:08.080 And and he's also the one who's written about how 1:02:08.160 --> 1:02:13.640 radius of trust evolved, uh, you know, through the prohibitions 1:02:13.640 --> 1:02:16.920 against cousin marriage. It's the Hendrick hypothesis, which is just 1:02:16.960 --> 1:02:19.360 a fascinating hypothesis. So those are the kinds of people 1:02:19.400 --> 1:02:20.120 I enjoy reading. 1:02:20.400 --> 1:02:21.520 Hut. 1:02:21.800 --> 1:02:25.720 And then and then fiction Nick Harkaway, Uh, I don't 1:02:25.720 --> 1:02:31.080 know the name. He's the pseudonym of of Jean Le Carrey. 1:02:32.360 --> 1:02:34.440 Jehan La Carey, of course is also a pseudonym. 1:02:35.000 --> 1:02:35.120 Uh. 1:02:35.480 --> 1:02:38.760 And he's taken up the Smiley series and he it's 1:02:38.800 --> 1:02:40.840 hard to make you don't want to read it, because 1:02:40.880 --> 1:02:43.240 who wants to read a book by the son of 1:02:43.320 --> 1:02:45.520 a great novelist. He's better than his. 1:02:45.600 --> 1:02:48.320 Father, no kidding? Yeah, wow, that wrote book. 1:02:48.360 --> 1:02:51.200 Carlo's choice, which is you won't be able to. 1:02:51.200 --> 1:02:53.320 Put down Carlos joints. 1:02:53.720 --> 1:02:55.360 Kay. If you know, if you're a Smiley fan, you 1:02:55.440 --> 1:02:57.440 know who carl is k A r l A all right, 1:02:58.320 --> 1:02:58.880 Russian spy. 1:02:59.360 --> 1:03:02.040 Huh sounds like fun. Bill, Thank you for being so 1:03:02.200 --> 1:03:05.880 generous with your time. We have been speaking to Bill Bernstein, 1:03:06.160 --> 1:03:09.600 author of so many fascinating books, The Intelligent Investor, Four 1:03:10.040 --> 1:03:11.400 Pillars of Investor. 1:03:11.600 --> 1:03:12.040 On and on. 1:03:12.280 --> 1:03:16.040 His most recent book is on the Delusions of Crowds. 1:03:16.640 --> 1:03:19.160 If you enjoy this conversation, well, be sure and check 1:03:19.200 --> 1:03:22.080 out any of the previous five hundred or so we've 1:03:22.160 --> 1:03:24.439 done over the past ten years. You can find those 1:03:24.560 --> 1:03:29.320 that Bloomberg, iTunes, Spotify, YouTube. Be sure and check out 1:03:29.480 --> 1:03:33.120 my new book, How Not to Invest The ideas, numbers, 1:03:33.240 --> 1:03:36.520 and behaviors that destroy wealth and how to avoid them. 1:03:36.840 --> 1:03:38.440 I would be remiss if I did not thank the 1:03:38.480 --> 1:03:42.439 crack team that puts these conversations together each week. John 1:03:42.520 --> 1:03:45.800 Wasserman is my audio engineer. Anna Luke is my producer. 1:03:46.200 --> 1:03:50.320 Sean Russo is my head of research. I'm Barry Richolts. 1:03:50.600 --> 1:03:54.240 You're listening to Masters in Business on Bloomberg Radio.