Transcript: Bill Bernstein




The transcript from this week’s MIB: William J. Bernstein, Efficient Frontier is below.

You can stream/download the full conversation, including the podcast extras on  iTunesBloombergOvercast, and Stitcher. Our earlier podcasts can all be found at iTunesStitcherOvercast, and Bloomberg.



ANNOUNCER: This is Masters in Business with Barry Ritholtz on Bloomberg Radio.

BARRY RITHOLTZ, BLOOMBERG RADIO HOST: This week, on the podcast, I have an extra special guest, William J. Bernstein, author of so many fascinating books about finance, as well as being a practitioner. Efficient Frontier Advisors run a nice log (ph) of money for ultra-high-net worth clients.

What’s so fascinating about Bernstein is how he began his career as a neurologist and then transitioned to being a financial theorist and money manager and book author. Really, an amazing career path and a fascinating conversation. With no further ado, my conversation with William Bernstein.

I’m Barry Ritholtz. You’re listening to Masters in Business on Bloomberg Radio. My special guest this week is William Bernstein. He began his career as a neurologist, before becoming a financial theorist and investment advisor. He’s the author of nearly a dozen books, many of which cover finance, including “The Intelligent Asset Allocator,” “The Four Pillars of Investing,” “The Investor’s Manifesto,” and several others.

He has also written several works of historical interest, including “A Splendid Exchange,” all about global trade, “The Birth of Plenty,” as well as “Masters of the Word.” William Bernstein, welcome to Bloomberg.

WILLIAM BERNSTEIN, AUTHOR: Happy to be here, Barry.

RITHOLTZ: So I’ve been looking forward to this conversation for quite a while. You and I have been e-mailing for several years. You have such a fascinating background and so unusual. Before you became a professional investor and an author, you were a neurologist. How long did you do that for? And what made you transition into finance?

BERNSTEIN: Well, I did it, more or less, for a third of a century. And I transitioned into finance and non-fiction writing, by virtue of the fact that I live in a country that doesn’t a functioning welfare system. And so, I had to save and invest on my own, and I approached the problem in a way that I thought that any person with scientific training would do, which is that you examine the peer-reviewed literature.

You read the basic texts. You collect data. You built models. And this got me to about the mid-1990s, and by that point I realized that I had created something that was actually of use to small investors. And so, I began writing finance. And as I’m sure we’ll get into later in the interview, one of the central skills that any investor should have is a working knowledge of financial history. And I discovered that I enjoyed writing history. And so, I segued into that.

RITHOLTZ: Do you miss medicine at all?

BERNSTEIN: I miss the camaraderie. I miss dealing with the personal interaction with patients, which is golden. And – and you know, I miss the knowledge and the competence that you exert. But the day-to-day practice does wear on you after a while. And there comes a point, I think, in every doctor’s career when – or at least most physician’s careers when they decide to call it quits.

RITHOLTZ: So one of the things you did – you mentioned data – you assembled an asset class database before they were really available publically. Why did you go about doing this? And where did you get your data from?

BERNSTEIN: I basically begged people for – for data. And I just collected as many data series as I could. And I wanted to basically create what’s called a mean variance optimizer, which is something that trades off return and risk, measured as standard deviance or variance.

And as much data as you can throw into it is good. And so, that was why I collected all of those data. Now, it turns out that that sort of exercise is a fool’s errand, as I very quickly figured out. But it’s still a useful skill, and it was a useful thing to do for small investors.

RITHOLTZ: Why is it a fool’s errand? Other than the fact that the data is relentless and it never stops.

BERNSTEIN: It’s a fool’s errand, because the output of mean variance optimizer, that is one of the most efficient portfolios, giving you the most return for the least amount of risk, or vice versa, giving you the least risk for a given amount of return is extremely sensitive to the data you put into it. So change the return of an asset by a percent or 2 in either direction.

And it might completely dominate a portfolio, or it might completely fall out of the portfolio. These things started to come on to people’s desktops in the early 1990s. And when they tossed in historical data, what did they find? Well, they found that the most efficient portfolio were heavy in Japanese stocks and precious metal stocks. Case closed. That’s all you have to know. And –



RITHOLTZ: P.S., 1989 was the peak of the Japanese market, and it has yet to recover those heights since.

BERNSTEIN: Exactly. And what some lags refer, you know, to a mean variance optimizer is as an error maximizer, just for that reason.

RITHOLTZ: That’s really great. So – so you create a website called the Efficient Frontier. What made you do this? And what made you decide to start putting all of your writings up in that one place?

BERNSTEIN: Well, I’ll give credit to a man by the name of Frank Armstrong, who is a financial advisor in Florida, and he’d done pretty much the same thing. He hadn’t collected the data, but he was on the web before any – you know, with financial writing, before anybody else was. And this goes back to well before 1995.


BERNSTEIN: And he encouraged me to do it. I had – you know, 1995, after I had completed the exercise I wrote a book called “The Intelligent Asset Allocator,” my first book. And I approached a bunch of publishers with it, and, of course, being someone with no experience and no credentials, you know, just a manuscript coming in over the (inaudible), it got rejected by 30 publishers. And Frank told me, “Hey, just put the book on the web.” And that’s basically how it took off.

RITHOLTZ: That was – what was your first published book, if that wasn’t your first published book?

BERNSTEIN: That was it. That was it.

RITHOLTZ: So you eventually got a publisher for that?

BERNSTEIN: Yes, the story is, is that, a man by the name of Robert Barker, who was a reporter for Businessweek, actually came to interview me at about 1998. And I told him the story, and I can still see the look on his face, as I told him the story about the 30 publishers. And he said, “Dear God, please tell me that one of them wasn’t McGraw-Hill.” And I said, “Well, yes, it was.” And he –

RITHOLTZ: Then owner of Businessweek, now owned by Bloomberg L.P.?

BERNSTEIN: Right. And he hid his – you know, sort of made a show of mock, putting his face in his hands, shaking his head. And then six weeks later, I got an offer from McGraw-Hill. He swears he has nothing to do with it, but, of course, I didn’t believe him.

RITHOLTZ: That – that’s absolutely hilarious. So given the nature of data now being ubiquitous, how is this changing the world for investors and for advisors?

BERNSTEIN: Well, you know, I think it was Bernard Baruch who said that something that everyone knows isn’t worth knowing. So that if everybody has these data and can operate on them, then they become nearly worthless. Gene Fama makes the point that everybody is basically everybody is basically working off the same database, you know, going back to basically 1926.

And it’s – you have to be very cautious about different studies that are still using (ph) based on the same database, because, I think, it Samuelsen (ph) who said we only have 200 years of history, and that’s not the complete – that’s not the complete sample.

RITHOLTZ: I think Roger Ibbotson and the folks at CRSP just back dated that from 1926 back another 150 or so years. Not that there was a lot of data back then. It was a whole lot less companies and a whole lot less trading. But the full run of publicly-traded U.S. companies, I think it was back now to the early 1800s, if I’m remembering that correctly.

BERNSTEIN: Yes, yes. And there’re people who’ve got probably far less detailed data bases than the Roger’s. And of course, you can go – you know, you can look at English stocks and you can at least get monthly and annual returns all the way back to the mid-17th century.

RITHOLTZ: So one of the things you’ve written, which I find quite intriguing, is that most returns are determined by the asset allocation of the portfolio, rather than the asset selection. Explain that.

BERNSTEIN: Well, there are risky assets and there are riskless assets, you know, Tobin’s Separation Theorem. And that’s how I view portfolios, is you’ve got the stuff that helps you sleep at night, and you want to keep that as safe as possible, things with a government guarantee. That’s – you know, that’s next month’s grocery money.

And then there’s the stuff which you’re not really going to be touching, or shouldn’t be touching, for decades, and that’s the risky stuff. And that’s really all there is to it. And I think – I think it is a bit of a mistake, not a serious mistake, but a bit of a mistake to mix the two. So junk bonds, for example. Corporate bonks, in general, I think are a mistake.

RITHOLTZ: Anything where you’re reaching for yield is not optimal?

BERNSTEIN: That’s correct. Yes, yes. Duration, I’m sort of neutral about. You can make the case, as you well know, that duration is certain a risk, particularly in an inflationary environment. But when the excrement really hits the ventilating system, duration is generally a good thing.

RITHOLTZ: Let’s talk a little bit about physicians and why they’re such terrible investors. My instinct is to say it’s ego and an excess of misplaced confidence. I think you’re going to say something else. Why are doctors such bad investors?

BERNSTEIN: Well, you’ve hit two of the high points, but the major reason, I think, is that they don’t take investing seriously. A physician – and I think most physician who are properly trained will not treat so much as a cold with a detailed review of the peer- reviewed literature, discussing things with their colleagues and, you know, a thorough review of the database that’s available to them.

On the other hand, physicians, when they approach investing, will do it by reading “The Wall Street Journal,” or “USA Today,” or “Kiplinger’s.” And the way I explain that to them is, you know, when you have to treat someone with a serious disease, you don’t get your information from “Psychology Today,” or “USA Today.” You go and you look at the most authoritative sources.

Investing is exactly the same sort of the subject. It’s a serious endeavor. And just like in order to do medicine, you have to start with the basics, anatomy, physiology, pathology, pharmacology, so to when you approach investing, you should exert a similar amount of effort. You should learn of the theory of investing. You should learn about the theory of investing.

You should learn about the history of finance and of investing. You should learn about its psychology. And lastly, you have to learn about the business aspects of investing, the people who are selling you the products.

RITHOLTZ: That sounds a lot like “The Four Pillars of Investing.” Those are the four broad categories, theory, history, psychology and actual business.

BERNSTEIN: The brown envelope is in the mail.

RITHOLTZ: So let’s talk a little bit about that. How did you come to the conclusion that those four broad subject areas are what underlies each investor’s – or should underlie each investor’s theory, the four pillars that support their portfolio?

BERNSTEIN: Well, by observing the mistakes that people make. And I found that people made four basic mistakes. Number one is they didn’t understand market theory, financial theory. They didn’t understand that there’s a correlation between risk and return. It’s the – almost like the law of gravity –


BERNSTEIN: – in investing. And they didn’t understand the theory of diversification. And they didn’t understand basic portfolio theory, how you mix assets. Secondly, they didn’t understand the history, and that came home during the tech bubble of the late 1990s, when people absolutely no idea that they were living through something that had happened many times before. There was a script to the movie, and if you read the script, you knew how the movie ended.


BERNSTEIN: And of course, 95 percent of the people who invested in the ‘90s did not how that particular movie ended. There’s a psychological aspect of investing, which you’ve alluded to, people being overconfident. And it’s not just that they’re overconfident about their ability to invest, but they’re also over confident about their ability to bear risk.

They throw – if they’re smart, they throw something into a spreadsheet – they throw a simulation into a spreadsheet and they say, “Here, I’ve lost 30 or 40 percent of my money, but it only lasted for a brief period of time. I can ride that through.” But there’s a big difference between doing that in real-time and doing that in a spreadsheet.

And the way I like to describe that is it’s kind of like the difference between crashing an airplane in a flight simulator and doing it for real. Your pucker factor, as pilots like to call it, changes. And then finally, what you also find is that physicians and a lot of people really don’t understand the conflicts of interest that are inherent in the business, which is a very polite way of saying that the financial services industry may be the country’s largest repository of criminal activity.

RITHOLTZ: Well, let’s hold aside the actual criminal activity and look at what’s legally extracted in terms of fees. There was a big debate about the fiduciary rule, coming from the last administration to this one, that people who were in the business of managing other people’s money argues the camp that I’m in should behave like doctors and lawyers and accountants, where the client’s best interest has to come first. But a lot of Wall Street thinks that that is problematic. It will impact fees. It will impact services. What’s your view on the fiduciary rule?

BERNSTEIN: I think it’s a superb idea, and I think it’s only a start. I think the odds that, you know, we’re going to see that in this administration, whether it lasts another two or six years, is about the same as you and my starting at shortstop for the Yankees.

RITHOLTZ: Right. I got a good glove.

BERNSTEIN: OK. Well, good. I’m – you know, I’m short and I can’t jump.

RITHOLTZ: Right. The rotator cuff, I won’t be able to – anyone who’s fast will beat the throw to first, but other than that –

BERNSTEIN: But there’s certain things that should just flat-out be, you know, felonies. It should be a felony to place, for example, an insurance product within an – a retirement account. OK.

RITHOLTZ: So wait. You don’t think putting in an expensive, tax-deferred annuity in a 403b, or otherwise tax-deferred account, is problematic? You have an issue with that?

BERNSTEIN: I’m afraid – I’m afraid I do. And you know – and I think there’s certain products that should just flat-out be outlawed. I think that, you know, double and triple and inverse ETFs are basically a mathematically certain way, in the long-term, of losing money. And the rationales that are given for further use are that, well, they’re useful for short-term timing. Well, you shouldn’t be doing that either.

You know, I mean that’s – you know, short-term timing of the market is one of the those activities that’s up there with high-risk secs and skydiving and visiting a Saudi counselor –

RITHOLTZ: If you’re – if you’re not an American journalist. Yes, for sure.

BERNSTEIN: Exactly, yes.

RITHOLTZ: You know, it’s funny. I will – we’ll move this to the back of the segment. But I was doing research on 403b for a column I was writing for Bloomberg. And I discovered, this is your point, is so well-taken about history impacting how you think about things.

As it turns out, the 403b, the retirement plan for teachers, for state workers, for anybody who works for a charity or non-profit, it predates 401ks by decades and was passed by Congress to sort of – apparently, a number of charities were doing those old insurance-based products for their employees. They were inexpensive. They were tax-deferred. There was no other alternative.

And Congress wanted to extend that to everybody, including people who work in various churches. And that’s sort of the history of 403b. And once the rules were changed and you had this tax deferral built in, and there was no longer a need for an insurance product, the momentum and the infrastructure around that didn’t go away.

And that’s part of the reason we see 403bs jam full of overpriced inappropriate, tax-deferred annuities that are better off, you know, nowhere, but certainly not in a tax-deferred, non-profit retirement account. It’s quite fascinating. I thought I would – I would mention that, and I just thought it was really interesting.

All right, back to where we were. So have your thoughts and ideas changed about asset allocation over time? Or was the original research compelling and you’ve stayed with where you began a good couple of decades ago?

BERNSTEIN: I haven’t changed my point of view very much. I mean, one of the sort of sardonic things I like to say about finance and how it’s different from other serious fields of endeavor is that if you want to be a good doctor, you’ve got to internalize thousands of medical articles and pieces of research, the same thing with, you know, law and all the case law.

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

I mean, just the past several months there was an article published by the Abu Dhabi Investment Authority on shared dilution and long-term equity returns. Very important article because it showed that in the long-term it’s dilution of shares or it’s opposite net buyback that determine returns. And so, you can explain, for example, the really just awful returns of Chinese stocks. This is a market with a lot of economic growth in the back of it, but the returns have been about the worst of any large national market because of the dilution.

On the other hand, when you look at the winners over the past 100 years, you know, countries like the U.S., Sweden, Canada, the U.K., Australia, South Africa, those have been the countries that have diluted their share pools the least.

RITHOLTZ: Quite fascinating. So let’s talk a little bit about the Efficient Frontier Advisors LLC where you manage assets. What motivated you to shift from being a doctor to an asset manager?

BERNSTEIN: Well, when you publish finance books and your find yourself quoted in national media, people start asking you to manage money. It’s that simple. And so –

RITHOLTZ: At a certain point you just can’t say no anymore?

BERNSTEIN: Pretty much.


BERNSTEIN: Yes, pretty much. And some people do say no, but I didn’t and I was fortunate enough to be in contact with someone who already had an advisory service up and running, a woman by the name of Susan Sharin, and we got together on the Internet and we’ve been in business for the past 21 years.

RITHOLTZ: Wow, that’s quite interesting. So you described this as a boutique investment advisory intentionally designed for a limited number of clients. What’s the thinking there?

BERNSTEIN: Well, the thinking is that both of us have already had careers and we’re at an age when we don’t want to do anything that isn’t fun, and it’s not fund managing money for people who don’t know anything about finance, so we restrict our practice to people who have a solid basis of knowledge of financial theory and financial history.

RITHOLTZ: Wait, so I have to interrupt you there. So it’s more than just, hey, you need a $25 million. It’s you have to understand what we’re talking about and be familiar with this so you get what we’re doing with your capital. Is that what the approach is?

BERNSTEIN: Well sure, because come 2008, 2009 we don’t feel like being woken up at 3 a.m.

RITHOLTZ: Right, right. So just in the broadest terms, what sort of services are you providing for this client base?

BERNSTEIN: It’s investment management only.

RITHOLTZ: Just pure. What about financial planning and taxes and estate planning and all of that fun stuff?

BERNSTEIN: The – our clients basically get that separately. I mean, of course, you know, when you talk about de-accumulation (ph) and life cycle planning, of course, we’re part of that because that’s part of the investment process, but, you know, estate planning and insurance recommendations, we make very little of those. We leave that to other people.

RITHOLTZ: And you do not accept new clients. You’re not out on a promotional tour to drum up business. No new clients for Efficient Frontier Advisors. When did you stop accepting clients and why?

BERNSTEIN: Four years ago and, you know, I liked to joke back then that we were both pushing 70 with a short stick and that stick is now well broken.


BERNSTEIN: And so, it’s – we really don’t feel like taking on new clients at our age, that’s number one. And number two, it’s not fair to be taking on a new client when you’re both getting the maximum social security benefit.

RITHOLTZ: Got you. You’ve written about the role of investment advisors and why they should be fiduciaries. What do you think is the appropriate way they should be compensated? This is like a really big debate these days?

BERNSTEIN: Yes, it really – it really depends upon the level of expertise of the client. You know, there are some people who are absolutely fine with, for example, an hour fee basis, but those kinds of people have to be comfortable making their own transactions.


BERNSTEIN: Once, you know, you’re in the model where you’re the one making the transactions, you’ve got discretion, I don’t think that model works anymore. I could be wrong, but I just don’t think that it does. And, you know, there’s the new fee model that Jason Zweig wrote about –

RITHOLTZ: Recently.

BERNSTEIN: Yes, just last week –

RITHOLTZ: A subscription.

BERNSTEIN: – of a subscription model which I think – I know, it sounds to me like a hybrid of the two. So to depends on how much hand holding you’ve got, but it gets to a more basic problem in our society which is that we live in a world where you’re expected to do your own retirement saving and planning and investing.

I mean, the analogy that I use is it’s kind of like you step on the airplane to go to Chicago and you turn right off the jet way to go your seat and the flight attendant says, “Oh, no, no, no. You’re turning left. You’re flying the airplane.”


BERNSTEIN: And, you know –

RITHOLTZ: Everyone’s become do it yourselfers not because they want to, but it’s been mandated.

BERNSTEIN: Yes, and it’s – I think it’s a colossally stupid system.

RITHOLTZ: So what’s a better system? How should we actually have retirement saving and planning set up?

BERNSTEIN: Oh, I think that there are several systems that work well, and I’m certainly not an expert on them, but the Dutch and the Canadian systems are well-funded at the national level.

RITHOLTZ: Is that funded by individuals or by taxpayers, or are they one in the same people?

BERNSTEIN: Basically by individuals. The Australian system as well and, of course, the Australian system you have mandated savings rates, you know, that are now going to be well north of 10 percent.

RITHOLTZ: So in other words when FICA and everything else comes our of my payroll, 10 percent gets pulled out and saved for retirement regardless of my desires one way or another.

BERNSTEIN: Right, exactly. A mandatory – a mandatory system and –


BERSTEIN: – of course, that will make a lot of libertarians happy –

RITHOLTZ: But then again, it’s not fair for someone who doesn’t save anything and then expects the states to take care of them at age 68 till 90.

BERNSTEIN: Right, exactly. Exactly.

RITHOLTZ: So that’s really quite intriguing. So you write the wealthier, different than you and I, they have more ways of having their wealth stripped away from them. Explain.

BERNSTEIN: Well, you know, when you become wealthy in our society, it becomes quickly externally apparent.

RITHOLTZ: If you so choose to flaunt it in that way. I think the new generation is less likely to wear flashy watches and drive expensive cars.

BERNSTEIN: Yes, but, you know, at the end of the day human beings are the apes who seek status –

RITHOLTZ: For sure.

BERNSTEIN: – and it’s under good evolutionary reasons having to do why people do that. And so, when you become wealthy, you’re basically painting a great big bulls eye on your chest for the bad actors in the business. I mean, the more wealth you display, the more likely you are to get hit by one of these people.

RITHOTLZ: Quite interesting. Your historical non-fiction works are very, very different in tone and content than the investing and financial books. They appear to be deeply, deeply researched. Every page is dense. In many ways, they remind me of your namesake. Peter Bernstein who’s similar books, every page just filled with so much information. What made you decide to start writing like this, like you are a full-time author?

BERNSTEIN: Well, when you start writing about finance, your realize that the history is so very important. We go into that in one of the last segments. You know, as Santayana famously said, “if you don’t know your history, you’re doomed to repeat it,” and no where is that more true than in finance. And I discovered that I enjoyed writing history. In fact, it was the part of the books that I wrote that I decided that I like the most.

And so, after I had written two books of finance, the intelligent asset allocator and the four pillars of investing, I approached my then publishers, McGraw Hill, and I said, “I would like to write a book about the growth inflection that occurred during the early 19th century.

Before, you know, about 1820 or so economic growth in most nations was very close to zero and then in the leading edge nations, the England, the United States, and most of Western Europe, growth rose to about 2 percent per year which, you know, compounded over the centuries has produced the enormous improvement in standard of living that we have.

And I wanted to know why 1820 because, you know, the industrial revolution had started almost a century before that. There was something else that was happening and I wanted write about that. So that was “Birth of Plenty” which was modestly successful and it also became a calling card as well for – that got the attention of other publishers.

RITHOLTZ: And then that led to “A Splendid Exchange”.

BERNSTEIN: Correct, yes. And Peter Bernstein gets into that story because a couple of years after I had written “Birth of Plenty” I get this phone call from an acquisitions editor at Grove Atlantic by the unlikely name of Brando Skyhorse, and Brando –

RITHOLTZ: That’s a phone – that’s a message you’ll take. Who? Yes, put him through.

BERNSTEIN: Yes. Yes. And so, he said, you know, “We want you to write a book about the history of world trade.” And I said three things. Number one, I don’t know anything about it, number two, I’m not interested in it, and number three, you’ve got the wrong Bernstein. And there was this sort of pregnant pause at the end of the line and he said, “Well, we actually did have lunch with him last week and we offered him the book and he said he was busy. He was busy writing his history of the Eerie Canal, but Peter said there’s this other Bernstein.” And that’s how I got to write the book.

RITHOLTZ: Oh, that’s funny. That’s very funny. This other Bernstein – that really is hilarious. So this obviously has a whole lot of work and research that went into it. What’s the process like? How long did it take to research this? How long did it take to write it?

BERNSTEIN: A book like this takes about four years to write.


BERNSTEIN: Yes, and the process is you start by doing just a truckload of reading. You know, when you write a book like this, you’re probably reading about somewhere around 50,000 pages of material. And the analogy I like to use is it’s kind of like you’ve got a puzzle – this enormous jigsaw puzzle to put together and you’re given 10,000 pieces but you can only pick 1,000 pieces to make the picture with.

So it’s a difficult process and it’s a skill set I guess that not everyone has, but it’s something – you know, it’s one of these things I discovered I actually knew how to do and it’s an enormously enjoyable process. I’ve – you know, this particular book was quite successful. The book that I wrote after that was an absolutely flop.

RITHOLTZ: Was it on the media?

BERNSTEIN: Yes, it was on the media. It was on the history of communications technology and media, but the point was – is that I had just as much fund writing both and I feel rush as good as I – about both. If you don’t enjoy the process, you should not be writing.

RITHOLTZ: To say the least. So when you say you read 50,000 pages quick back in the envelope, that’s 100 books at 500 pages each or something like that?

BERNSTEIN: Yes. Of course you’re not reading 100 books. What you’re doing is you’re climbing the bibliographic tree. And you might read a few of those books all the way through, but what – in fact, what you’re really doing is you’re reading lots of book sections, just maybe a couple pages or even a paragraph or two from each source.

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

RITHOTLZ: Let me throw a few questions at you from the book. The world’s greatest human cataclysm – the plague, the Black Death – was the direct result of long established trading patterns. Explain that.

BERNSTEIN: Well, it’s a fascinating thing that epidemiologists like to talk about which is that when you – at least medical historians like to talk about, which is that when you look at the world around the year 100, you had these pools of people, these civilizations and tribal societies that never communicated with each other, didn’t talk, didn’t deal with each other, didn’t even know that they existed. And so, they each develop their own gene pools that people outside that pool we’re totally vulnerable to.

And so, there is this organism called Yersinia pestis, the plague bacillus, which existed in ground rodents –

RITHOTLZ: Ticks on rodents or fleas on rodents?

BERNSTEIN: Fleas, yes. Fleas, yes. Fleas on – fleas on rodents and the animal that, you know, back in that part of the world was an animal called the tarabagan and the rat was – they didn’t – fleas didn’t learn to jump onto the rats until much later. And this, you know, was present in East Asia, Northeast Asia and probably in the Indian subcontinent as well. And then during the 12th and 13th century you get the period of time called the Pax Mongolica when the Mongol tribes concurred territory all the way into Eastern Europe and –

RITHOLTZ: Genghis Khan and that whole group.

BERNSTEIN: Right, and the other Khans, yes. And so, they opened up trade – land trade routes. And of course the fleas hopped a ride on the camels and they got to a place called Kaffa (ph) in Asia Minor or actually in what’s now the Ukraine. And there’s this terrible siege of Kaffa (ph) where the Mongols are besieging Kaffa and they throw over – they catapult over the city walls these corpses.

RITHOLTZ: Biological warfare.

BERNSTEIN: Exactly. And that infects the Genoese traders who then basically carried the disease first into, I believe, the Port of Messina in 1346, and then within three years a quarter to a third of the population of Europe was dead. The damage in the rest of the world was much worse. Probably it killed as much as 90 percent of the people in the main ports of Egypt as well as in China.

RITHOLTZ: And a lot of this has to do with the fact that there is no indoor plumbing, there is no system of sanitation, and that filth and other things are continuing to be spread or is that a different –

BERNSTEIN: That wasn’t – that wasn’t the mechanism of the plague. It was more of an airborne disease. People would develop a cough and transmit disease that way, which is very rapidly spreading.

Now, the thing that’s really interesting is that we worry about international air travel and how rapid diseases spread, but we’ve not seen anything nearly as deadly as the plague or, for that matter, the influenza outbreak that occurred after 1918. And the reason is the danger is not mixing. It’s mixing that’s the danger.

RITHOLTZ: So in other words, we now have a broader gene pool around the world and we’re more capable of fighting off – there are less new things that are specifically capable of doing damage to a gene subgroup. Is that right?

BERNSTEIN: Yes, I think we’re in a much safer world than we were, you know, say seven or eight centuries ago, and we’ve also gotten to be – public health authorities have gotten to be really good at disease prevention as well.

BERNSTEIN: We tend to think of stock and bond markets as a relatively recent historical phenomenon, but you write there have been credit markets since human civilization first took root in the Fertile Crescent. In other words, thousands of years ago. Is that right?

BERNSTEIN: Well sure, and there’s actually a trace of interest rates that goes back at least 4,000 years and perhaps as much as 5,000 years. You know, if you’re a farmer – a sedentary farmer in the – in Babylonia or Samaria, you need credit. You need to borrow money for farm implements and to build a house, but most importantly to buy seed corn.

And, of course, you’re not borrowing money. You’re not even borrowing silver. What you’re doing is you’re borrowing seed corn from your wealthier neighbor and that seed corn has a cost of capital. So typically in very primitive agrarian societies, it’s probably around 100 percent per year.

RITHOLTZ: So in other words, I bought – borrow one bushel of corn or wheat seeds, and in exchange I return two. Is that about right?

BERNSTEIN: That’s right. Or one calf and then a year later at calving time, you got to return two calves.

RITHOLTZ: Quite interesting.

BERNSTEIN: And that’s capital.

RITHOLTZ: And that’s considered capital in those days.

BERNSTEIN: Exactly, yes.

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

BERNSTEIN: One of the things that is most satisfying about writing non-fiction is to come up with historical examples of modern phenomena that are 300 and 400-years-old and even thousands of years old. And there’s this wonderful story of these riots that swept London in – around the year 1700 have to do with the textile trade where weavers stoned and attacked parliament, the East India company offices as well as the home of the governor of the East India. It was basically the Seattle riots–


BERNSTEIN: — 300 years ago. And the reasons for it were exactly the same. They were people who were out of work. So, clearly we’re much better off now because of trade.

And cut ff trade increase tariffs, and you’re going to find yourself in the situation of the Iowa soybean farmer who is going to lose his farm very shortly because o the Trump tariffs. Are you going to find yourself as consumer paying three and four times for your shirts and your electronics?

What you’re used to, or of automobile manufacturers whose costs have gone up because of metal tariffs. So clearly trade benefits an entire — the entire nation. And you saw that in reverse during the 1930s with the trade wars that followed the Hawley–Smoot tariff. But they are always losers, OK.

There are textile workers who have lost their jobs. There are auto workers and steel workers who have lost their jobs. And you have to — the key to a successful global economy and a national economy is simply to have a system that compensates the losers.

And to think that you can cutoff trade and not compensate he losers which is what this administration wants to do I think is the height of falling.

RITHOLTZ: So, when you say compensate the losers, traditionally that has been some sort of job retraining or new education. How else can we compensate people whose industries no longer exist? If you’re a coal miner or if you’re a furniture manufacturer in the U.S., these jobs are going away.

What should we be doing as a nation for the losers on that and really the better way to say it is the people who are on the losing end of these international trade deals.

BERNSTEIN: Well those are the first two things that you need to do. But you need a broader social welfare network. If you lose your job, you shouldn’t lose your health insurance.

RITHOLTZ: We’re the only nation in the world that does that.

BERNSTEIN: Exactly. We should increase — do things that increase social mobility. The United States in fact has the lowest social mobility of any developed nation. If you are born in to the bottom quintile of income, the odds of getting in to the top quintile of income are only 6 percent in the United States.

It should be 20 percent in a perfectly egalitarian system. In most developed countries, it’s about 13 percent. Now when you look inside the United States, it’s very interesting.

What you discover is that in Silicon Valley for example if you are born in to the bottom quintile, the bottom fifth, you have a European chance of getting to the top quintile, about 13 or 14 percent. But if you’re born in the bottom quintile in Alabama, you’ve got a 3 percent chance.


BERNSTEIN: What does that tell you? It tells you that people in Alabama are not investing enough in their young people. And so that’s probably the primary thing we should be doing as base.

Is we should be investing far more money in education. I find it remarkable the people who rail against the public school system and the money that we supposedly wasted in that system will happily three and four times that amount every year on their — to send their kids to private school.

RITHOLTZ: Quite interesting. You discussed how economic mobility has — is so low in the U.S., it wasn’t always the case, wasn’t there much greater economic mobility previously especially the post World War II era?

BERNSTEIN: Well, just to give you one small very anecdotal very small example, my medical school tuition was $1,550 a year. I came out of medical school with almost zero debt. Good luck doing that today.

RITHOLTZ: Right. It’s $200,000 a year if it’s anything. It’s quite insane. Let’s talk a little bit about “Masters of the Word: How Media Shaped History” from alphabet to the internet.

So there are a lot of really interesting bullet points in this book. You make the case that Gutenberg did not change the world with the printing press, but in a slightly different way. Explain.

BERNSTEIN: It’s a fascinating bit of technology which is that of course he didn’t invent the printing press, the Chinese and the Koreans had it, they even had the — the Koreans even had movable alphabetic type. What Gutenberg did was to make the production of that type much more efficient.

If you think about running a printing press or printing a book, you’re talking about literally owning hundreds of thousands of pieces of type. And if you’re casting that individually via the preexisting processes that was something that was open only to governments.

The Chinese government was able to do it. Back then there were some Korean printers who could do it. And that was about it.

Gutenberg invented a metal alloy process of casting that enabled a skill typecaster, my favorite word, a typecaster who could produce about three pieces per minute of alphabetic type and basically bring it down to the artisan level.

So, what Gutenberg did was he didn’t invent the printing press, what he did was invent the efficient production of moveable alphabetic type which was a far more subtle invention.

RITHOLTZ: So, here’s another bullet point from “Masters of the Word.” You write the fall of the Soviet Union resulted from a colossal error in radio production. Explain that.


BERNSTEIN: Well, the Russians produced — mass produced their radios in a couple of factories. It was very centrally driven. And they made a mistake that th Nazis didn’t make.

The Nazis were smart enough when they made their radios and the Nazi regime basically came in to being pretty much at the dawn of popular radio in Germany. And they made sure that the radios were not tuned well enough to produce foreign broadcasts.


BERNSTEIN: And the Soviets didn’t do that. The Soviets built radios that allowed tens of millions of their citizens to get the BCC and Voice of America and Deutsche. It was just a colossally — this sort of colossally stupid thing you would only see in a centrally planned economy.

RITHOLTZ: That’s hilarious. So, now one of the things you write about this in the sort of pre-social media days was that as more people get access to means of communication, the result tends to be more democracy.

Do you still hold those views in the face of how much “fake news” quote unquote and the way Facebook has been weaponized to influence elections. Do you still hold those views? Or what are your thoughts about that change in social media.

BERNSTEIN: I still believe the basic precept. I mean the analogy that I like to use is that in the — the era of radio and television, it was so centrally controlled that getting in to a fight with the national powers that be whether it was the media or the government or the government controlled media was like bringing a knife to a gun fight.

Now both sides have guns. What I really didn’t anticipate — and I don’t think anybody anticipated even five or six years ago is that you’ve enabled the worst players in our society. And that’s the — this industrial grade (bleep) that — that’s your phrase by the way.

RITHOLTZ: Industrial grade (bleep).


RITHOLTZ: Yes, all right. But it’s true, it’s not just run of the mill BS, it’s manufactured at a very high level.

BERNSTEIN: Yes. And of course there’s this famous moral philosopher named Harry Frankfurt who will be doomed forever after for a little 68 page essay he wrote–

RITHOLTZ: That’s right.

BERNSTEIN: — called–


BERNSTEIN: On BS, yes. And what is BS? BS is not just things that are necessarily false; sometimes BS can actually be true. But it’s just words that are spoken that have no reference and no intentional reference to the facts. And of course we have now in trying that in our commander and chief.

RITHOLTZ: The description I like best is we live now in a post-fact era which kind of cracks me up because I don’t believe there’s such a thing as a post-fact era. But here we are. And can you stick around a bit? I have a ton more questions for you.


RITHOLTZ: We have been speaking with William Bernstein, author of such books as “A Splendid Exchange” and “The Four Pillars of Investing.” If you enjoy this conversation, well come back and check out the podcasts extras where we keep the tape rolling and continues discussing all things finance.

You can fund that at iTunes, Overcast, SoundCloud, Stitcher, wherever finer podcasts are sold. We love your comments, feedback and suggestions right to us at

Check out my daily column at Follow me on Twitter at Ritholtz. I am Barry Ritholtz; you’re listening to Masters of Business on Bloomberg Radio.


RITHOLTZ: Welcome to the podcast. Will, thank you so much for doing this. I had been looking forward to having this conversation. You and I have swapped e-mails over the years and you’ve had some lovely things to say about this format so I’m thrilled to finally get you in here in the booth and have this conversation.

BERNSTEIN: Could I say a lovely thing or two about your format?

RITHOLTZ: If you feel inclined.

BERNSTEIN: Yes, I do. There aren’t very many people in this world that I actually envy. But you’re one of them. There are a few things that I enjoy more than talking to people who have interesting things to say and that seems to me to be all that you do. Whoever you feel like talking to, you can get on this program.



RITHOLTZ: Don’t let anyone else know, that’s my secret.

BERNSTEIN: Yes. And I envy the heck out of the platform that you have and how you enjoy yourself.

RITHOLTZ: I’m going to let you in a little secret, my writing is for the audience of one and this show effectively is for an audience of one. I have managed to con everybody in to thinking that this is supposed to be a broadcast. But essentially it’s me having a conversation that I want to have.

BERNSTEIN: Yes, you get people to answer your e-mails who never answer my e-mails, and I am green with envy.

RITHOLTZ: Well, if I can help make an introduction, I would be happy to do that. By the way you’re not the only person who said that to me, some other people who I won’t say on air but I’ll tell you privately have said that to me. And it’s really — oh, really? So people have figured out that this is a giant self indulgence and they wish they could do.

See if you weren’t in Oregon, if you were in New York, you can wing something like this together. Other people have done this in a way. Marc Maron started in his garage in Los Angeles and since he was a stand up comedian for forever.

He would con his comedian friends to come in and that’s blown up in to this giant thing. So, there’s something to just engaging in a little bit of self indulgence and speaking to people you want to speak to.

BERNSTEIN: Yes. One thing Barry, it’s Oregon. You say Oregon too–

RITHOLTZ: Oregon, yes.

BERNSTEIN: You say Oregon too many times–

RITHOLTZ: That’s a band actually, there was a band called Oregon–


RITHOLTZ: And I — that’s where that comes from.

BERNSTEIN: Yes, but you do it too many times we take away your visa.

RITHOLTZ: To come to what’s going on in Portland, Oregon. It’s — that is a city that is now both booming and kind of completely out of control, isn’t it?

BERNSTEIN: Yes, it is. It’s what happens to any city when it become too popular and the cost of residence, the cost of real estate goes up is you get out of whack of course. We have — the ultimate example of that is San Francisco which–


BERNSTEIN: — has gotten to be this ludicrously bifurcated place that is populate bi-modality on there’s one peak of people to the right of the curve who have math SATs of 750 and can talk in differential equations and in finance and who are very well dressed and are spending $9 on avocado toast for breakfast.


BERNSTEIN: And then you’ve got the other 90 percent of people who are on the (inaudible) homelessness or are homeless.

RITHOLTZ: Speaking of which, the west coast has far more homelessness than every time I’m out there than I previously remember. And the last time I was in Portland I was shocked at the number of people living on the streets, it’s quite amazing.

BERNSTEIN: Yes, serious problem is one factoid that I have seen repeated. I have not verified it which is that if you take Los Angeles out of the analysis, the homeless rate in the United States is actually falling.

RITHOLTZ: Oh, really?


RITHOLTZ: So why Los Angeles other than the weather allows you to live out there year around.

BERNSTEIN: Yes, probably just it’s like any other complex social phenomena, it’s a list of factors whether — and the very high costs of housing. It’s geographically disperse so it can accommodate a lot more homeless people without making people too upset, just a whole range–


BERNSTEIN: — of things, yes.

RITHOLTZ: And the stat I saw that’s so disturbing is north of 50 percent of homeless people are suffering from some mental or emotional disability. And because they’re homeless, they don’t access to medical care or regular prescriptions.

BERNSTEIN: Yes. If you dole out food in a homeless shelter, what you very quickly find out is there’s three populations of people. One are substance abusers, two are schizophrenics, and three and equally large people — group of people are people just like you and me who are working their rear ends off and are extremely conscientious.

But they got a bad draw. They loss their job, they loss their health insurance, they became ill, they went bankrupt and they wound up living in their car.

RITHOLTZ: That’s quite horrifying. And when we talk about lack of a social net, that’s the group that seems to fall through the cracks. Although there are that many schizophrenics who are untreated and they’ll eventually become homeless. Is that the implication there?

BERNSTEIN: That’s a really good question, is to what percentage of schizophrenics become homeless, it’s a very high percentage of them.


BERNSTEIN: Yes, I mean they’re the ones who are most visible because those are the ones who are shouting at the top of their lungs as you walk them on the street.

RITHOLTZ: So, there’s a bunch of questions we did not get to during the broadcast portion. And I want to run these by you before we get to our favorite questions. Some of these are really quite intriguing. Let’s start with finance and then work our way through some variations.

When a — I’m going to give you a quote of yours, “when a famous investors starts publishing a newsletter, it a sure tip off his investing techniques have stopped working.’ Discuss.

BERNSTEIN: Well, that’s an oldie but a goodie. If you or I actually know how to reliably beat the market, you’re not going to tell anybody about it. You’re not even going to tell your own mother about it.

You are going to leverage yourself to the hill. You’re not going to take anybody else’s money. It’s not new that you haven’t barrowed yourself. And then when you’re done you’ll go to the beach. You are sure as not — you’re sure as heck not going to publish a newsletter and sell it for $200 a year.

RITHOLTZ: My favorite part of the Jim Simmons renaissance technology lure is after a few years of the medallion — their flagship fund thrive off 40 percent annually. They basically said to investors listen, there’s a fine amount of alpha here and there ain’t enough for you and me.

So, you got to go. And they returned all of the outside money and now the medallion fund has been renaissance technology employees and Jim Simmons, that’s basically it. 40 percent a year for 40 years, something like that, it’s a crazy, crazy number.

Speaking of crazy numbers, I don’t remember which book this is from, but this really blew my mind. An old master painting bought from the artist for $100 and sold 350 years later for tens of millions of dollars returns but 3.3 percent annually. Explain that.

BERNSTEIN: Well, it’s called the magic of compounding. If you save and you have a decent rate of return even a modest rate of return over hundreds of years, then you’ll have a fabulous amount of money.

But of course you can’t do that because you’re going to want to spend some of the money, let alone let it ride for three or four generations. Now Ben Franklin did that.

RITHOLTZ: In what way?

BERNSTEIN: Well, Ben Franklin set up an investment portfolio — I have to admit I’m not aware of details of it, but it was a portfolio that was designed to last sum very long period of time and benefit his charitable causes. And it actually did earn a decent rate of return over a period of more than a century wound up being worth a lot of money.

But what I like to say about that is that yes, if you put $100 in to stocks and then save it for 70 years and invest it for 70 years, you’re going to have a fabulous amount of money. But myself, I’d rather be 20 years old with a few Euros in my pocket on the boulevards of Paris than be 90 years old with millions of dollars.

RITHOLTZ: Thank you so much for saying that. I get the fire group of people who think you should live like a proper for every penny you have in to the stock market for 10 or 15 years and then retire at age 40. And it just seems so wrong to me to not enjoy life in your 20s and 30s. Who wants to live like that if you can avoid it?

BERNSTEIN: I tend to be — I tend to be fairly sympathetic to the fire group (ph) but it’s a suspicious, it’s a suspicious group of people, a lot of these people were people who were making six figure incomes in the tech industry and then got to retire at age 33 or 35 —

RITHOLTZ: With a giant pile of stock options too.

BERNSTEIN: Right, exactly. And that works really well as long as you don’t have children or get sick.

RITHOLTZ: Right. That’s right. But there is something to be said for being able to enjoy and appreciate the work you do and finding some meaning and some value in your hourly labors and not just split word and round up and water the horses and live the life of a hermit, or so it seems.

BERNSTEIN: Moderation in all things.

RITHOLTZ: That makes perfect sense, so there’s two others that were — that really stood at. I have a pet thesis I’ll share with you in a moment, but you wrote at a very early stage in history we are encountering survivorship bias, the fact that only the best results tend to show up in history books. Explain.

BERNSTEIN: Well, there’s a classic example of that from World War II.

RITHOLTZ: Sure, Ari Waldman (ph) and the planes coming back —

BERNSTEIN: Right, exactly. Yes, so as you know, just for the readers who — listeners who haven’t heard this. When they analyzed the bombers that came back from World War II and they looked at the patterns of the shrapnel —

RITHOLTZ: Bullet Holes–

BERNSTEIN: — yes, they found that there was areas that didn’t ever seem to get hit, and of course the reason why they never get his, is when they got hit in the fuel tank you didn’t come back.

RITHOLTZ: Or the engine, if it hit the engine you’re not going to make the flight back.

BERNSTEIN: It’s the same thing in finance. You see the people who did well, you — the thing that sticks in your mind is the guy who bought Amazon or Microsoft on the IPL but what you don’t see are the other 99 percent of IPL investors who did — who had their heads handed to them.

RITHOLTZ: So, there was — I call this the lost and found stock certificate, there was a story in the papers — it’s got to be a decade ago — Uncle Fred buys some EMC and he gets the certificates and it goes into a fire box and it gets stuck somewhere in the attic and nobody looks at it for 25 years and then they find the stock certificates and wow it’s worth 6 million dollars and it makes the paper and it’s fascinating.

But the reason that’s so misleading is if you would’ve bought GM and then GM subsequently declares bankruptcy or fill in the blank. Lehman Brothers or packs dot com (ph) or whatever, when he finds those stock certificates, nobody tells the newspaper, nobody writes a story, you don’t hear about it. You only hear about the odd ones that wow a fortune was created and that’s pure survivorship bias.

BERNSTEIN: And it’s the same thing to a more subtle degree, but a more important degree probably with mutual funds. There are mutual funds that have done very well and have good long term records, have beaten the market, but you know for every one of them there are probably 20 or 30 that got euthanized by the fund family because they did so poorly and you don’t even see those in the record unless you have the right database.

RITHOLTZ: So that gets pulled out of the data and it makes these surviving funds average look much better than it should be?

BERNSTEIN: Yes, and it’s a much even bigger problem with hedge funds and private equity.

RITHOLTZ: About 25 percent of hedge funds disappear each year because of that high water mark. Right, it’s two and 20, the 20 percent being 20 percent of the net gains above a previous high so if you suffer a draw down, you’re not going to get that big fat 20 percent through your up and over, so they dissolve and start over and it makes the numbers look much better than they should be. So my pet thesis on survivorship bias is that everybody’s conception of the world is completely wrong, everything we see is survivorship bias.

When you look at a pen or when you go to a restaurant you like, which perhaps is the best example, how hard could running a restaurant be, you get a good chef, you get a friendly hostess, you get a little media buzz, you don’t see the other for each successful restaurant you’re not seeing the other 100 that have come and gone after six months at great expense and anguish and there’s a reason it’s a terrible investment, there’s a reason films and plays are terrible investment, most plays aren’t Hamilton. So, everything is survivorship bias

BERNSTEIN: Yes, and you were talking about how doctors are such awful investors, I mean doctors are certainly not the only occupational category that’s susceptible to that. I mean, entertainers and sports figures in particular regularly lose their shirts on restaurants.

RITHOLTZ: When you look at the bankruptcy statistics for especially NFL and NBA players, very, very high. It’s a shocking, shocking number. And then, you know the one other book we didn’t talk about was the e-book, the deep risk book, was that an e-book or a print book?

BERNSTEIN: Well, I’ve produced four e-books, actually, 5 e-books. One of them I give away for free, that’s If You Can, and its probably the most widely distributed of my books.

RITHOLTZ: If You Can, I’ve seen that.

BERNSTEIN: Yes, which is a book for Millennials, and it’s been hundreds of thousands of downloads.

RITHOLTZ: Really? That’s great.

BERNSTEIN: Yes, because it’s free. It was an alimoncinary (ph) project aimed at Millennials who didn’t have assets, and I have three short booklets, Deep Risk in the Ages of the Investor, and Skating where the Puck Was, and I sort of combined that and bunch of other things into a newer version of Intelligent Asset Allocator called Rational Expectations, which was published four or five years ago, so that’s probably a book that superseded the Intelligent Asset Allocator, it’s basically meant for the same math geeky kind of audience.

RITHOLTZ: And you call this investing for adults, something like that?

BERNSTEIN: Yes, that — those five series — those five books I sort of fold into what I call my investing for adults series, which is a — you know, it’s for investing adults, people who basically understand market efficiency and who understand the relationship between risk and return, and know that there is no returns fairy and no stock picking fairy and no market timing for you (ph).

RITHOLTZ: So when you say adults, you are not using that chronologically, you’re using it in terms of being a sophisticated investor, or at least an informed investor?

BERNSTEIN: Yes, I’ve met 16 year old investing adults and I’ve met 75 year old investing infants.

RITHOLTZ: I swear to God, this is true. I used to get these emails all the time, especially when I was doing a lot of television, and the email went something like this, I just inherited a million dollars, what — or a substantial sum of money, I’m going to give 100,000 to five different fund managers and whoever generates the best returns I’m going to give my real money to. And it’s like why are you incentivizing people to take risks and hope they get lucky, you’re not incentivizing anybody to manage your real money appropriately.

They don’t understand that, it’s bad game theory or the other one, I’m looking for double the market performance but with half the risk. I like that one also, that’s an email I used to get all the time. Well, as soon as you find that, let me know, I have a billion dollars for. But short of that, you’re — that’s not really going to happen. Since you’re not taking money from people anymore, how does that change how you interact with the public through your site, is it a different relationship, do you get sort of crazy emails like that? What is — what do you see flowing to you from that Efficient Frontier site.

BERNSTEIN: Well, I intentionally make my email address opaque, if you go —

RITHOLTZ: It’s there, you can hunt it down.

BERNSTEIN: You can hunt it down and it basically makes you feel bad if you email me. It’s one that’s for press only, and that basically scares away 99 percent of people who want to run me down. The people who want to run me down, who actually go for that email are people simply who’ve read my books, they don’t want information, they just want to thank me.


BERNSTEIN: And that’s — yes — that is, you know, about once a week I get an email from someone that says, you know you saved my life, thanks so much.

RITHOLTZ: That’s delightful.

BERNSTEIN: Yes, and it’s better than the royalties.

RITHOLTZ: Yes, I would certainly say so. Before we get to our favorite questions, I had one last question to ask you, and that’s the biggest distraction, what is the biggest distraction investors run into.

BERNSTEIN: Oh, well it’s just the entertainment aspect of investing; it’s the CNBC market environment. The idea that what’s going — you know, where the market’s going next year, or what company is producing the best product or what country has the hottest economy, it’s what Jane Bryant Quinn called financial pornography.

RITHOLTZ: So, here’s the quote of yours relevant to that, 99 percent of what you read about investing in magazines and newspapers and 100 percent of what you hear on television is worse that useless, are you overstating that, or is that pretty much a decent set of figures?

BERNSTEIN: Well, I mean if you’re really asking, I’ll tell you what I really think. But you know, I mean that’s true, the way I like to put it is that CNBC at base wants to make you poor and stupid.

RITHOLTZ: So, that’s a different website, the conspiracy to make you poor and stupid. I used to jokingly say, you know, you don’t walk into a doctors office and have general hospital playing on the television if you did you would run screaming from the room. And my pet theory is each of the financial channels reflects their parent company. So, Bloomberg is a data services company, Bloomberg television is all about charts and data and graphics. NBC is an entertainment company, so CNBC become all about entertainment, and then FOX business is their parent company is FOX news so it’s all about politics and tribalism and partisan warfare, and each of the financial channels just reflects what the ethos of the parent company is.

BERNSTEIN: God, I thought FOX Business was about anchors in short skirts.

RITHOLTZ: No, no that’s generally across the whole line is that when you look at some channels more than others, sex sells and especially when you’re marketing to primarily male audiences, I don’t know if it’s still a primarily male audience but that sort of 90’s thing — the pre-me too era, that doesn’t seem to have changed very much in the past couple years —

BERNSTEIN: That environment. (ph)

RITHOLTZ: — the words you don’t read anymore is leggy blonde anchor people but pretty much that’s mostly about what it continues to be, right? I’m — I’ve read descriptions like that in magazines and it’s pretty straight forward.

BERNSTEIN: Yes. And if I can get all wonky on you — you know, you asked about the return on art and the reason why the return on art is so low is because it has an entertainment segment part of the return as well, and this is work that Bill Baumol, NYU very famously did, which —

RITHOLTZ: Bill Baumol? B-A-U-M-O-L?

BERNSTEIN: — Yes. In which he looked, he actually has a return series of art going back centuries and found that on average it’s got a lower return than stocks and bonds because part it’s return is in entertainment returns, so if you want entertainment from investing, you are going to pay for it.

RITHOLTZ: You’re going to get a lower return, courtesy of the entertainment.

BERNSTEIN: Exactly, the investment you want is the one with zero investment — excuse me, zero entertainment return, which leaves more room for the investment return.

RITHOLTZ: Right, so it’s — I always advise people who can’t pull the needle out of their arm — set up a fund account of 5 percent, keep it in a different custodian from your real money, and if it works out, great, and if doesn’t thank goodness it was only 5 percent and it’s sort of like a little bit insurance so people aren’t day trading their retirement, but that’s basically what happens.

BERNSTEIN: Yes, same advice that I give.

RITHOLTZ: Really? That’s quite — that’s quite interesting, it makes me feel that that’s the right approach. So, lets go to our favorite questions, we ask these of all our guests, starting with what was the first car you ever owned, year make and model?

BERNSTEIN: It was a 1972 blue — baby blue fiat 850 spider purchased at the factory in Milan for $1,885. And it needed to be tuned every 3,000 miles, it was —

RITHOLTZ: Tuned? Not oil changed, but full tune up?

BERNSTEIN: — Tuned, full tuned every 3,000 miles.

RITHOLTZ: Fix it again, Tony.

BERNSTEIN: Exactly. And you also have another question about what’s one of the — one of the biggest mistakes you’ve made, and what did you learn from then, it was both an enormous joy and ever since then I’ve owned Japanese cars.

RITHOLTZ: That makes perfect sense. You know, you talk about art, every now and then I’ll see a column somewhere about if only you had bought the Ferrari 250, it’s worth 10 million dollars today, that neutrally (ph) cost $5,000, here’s the return, it’s like well what about all the other cars that came out that year that you could’ve bought and didn’t it’s just a pure exercise in survivorship bias.

BERNSTEIN: Yes, and the — you — you can’t — you can’t find Fiat 850 spider now almost for love or money, you can, but they don’t cost very much, they’re very hard to find because none have never lasted that long.

RITHOLTZ: That’s right. So what’s the most important thing that people don’t know about you?

BERNSTEIN: That’s a — that was a tough one, but what I came up with is that only the people who know me the very best understand how easily bored I am. I’m the kind of person who likes being on the steep part of the learning curve, so most people in medicine find neurology fascinating and I did too for about 10 relatively short years and then I got bored with it, and it’s the same thing with all the other things I’ve done with my life, you know I’ve written a history about rural (ph) economic growth, I’ve studied finance, I’ve written about world trade, now I’m writing about human irrationality and you know, I just enjoy reading new things.

For me what I like to say is that — is that writing is just a way of organizing my reading properly and in an interesting manner, and it’s a good — it’s a fun way of staying on that steep part of the learning curve, to always be learning new things.

RITHOLTZ: So you, you’re going to be writing on human irrationality, you obviously use behavioral economics in a lot the work you do in finance, and you were a neurologist. There’s a subsection of behavioral economics that some people have called neuro finance, where you’re really looking at what’s going on within the brain, within the endocrine system, is that right?

BERNSTEIN: Oh yes, you’re talking about of work that gets done with functional imaging (inaudible) —

RITHOLTZ: Right, MRI’s —

BERNSTEIN: — particularly (ph) functional MRI. And I think it’s overdone, it’s become way too fashionable, you know as important as the (inaudible) work is I think it has — its relevance to finance, all though it’s great, it’s not as great as an area that I think is relatively ignored, and that’s evolutionary psychology. We behave in certain very irrational ways, and it’s nice to be able to identify the ways in which were irrational which is was common tversky (ph) are justifiably famous for.

But if you just read common tversky (ph) you don’t understand what is in back of that behavior, to give you a small example — the fundamental characteristic that we have, we’ve already mentioned is that humans imitate or in finance we say that humans herd. Why do humans herd?

Well, if you think about it, the easiest way to think about that is to think about the history of our species in the western hemisphere over the past — depends on what archaeological record you believe between 15 and 50,000 years. And over a period of a very few thousands of years, maybe three or 5,000 years, humans spread from the highest subarctic in Alaska and the Yukon all the way down to the southern tip of south America which has a not very dissimilar climate.

And on the way they had to learn how to make kayaks, they had to learn how to make poison darts, they had blow guns, they had to learn how to hunt bison on the Great Plains, and you can’t learn how to do any of those things on your own.

If each individual person had to learn how to do all of those things on their own, they would’ve very quickly become lunch for a predator. And so you find the one person who learns how to build the kayak, make the blowgun , hunt bison, and then you imitate what that person does, so we are the species that imitates, we are the ape who imitates and once you understand that, a lot of economic activity, and particularly behavior in finance becomes a lot more understandable.

RITHOLTZ: So am I grossly oversimplifying this, because I’ve looked at the same thing from a evolutionary standpoint and I always thought, hey primates are a — they’re a herd creature, there a — I don’t know what’s its called for monkeys, a tribe?


RITHOLTZ: A troupe of monkey or whoever of chimps and that the reason we care about social status is that we want to be part of the group, if you’re not part of the group you can’t survive on your own, and so only those creatures that can herd — play well with others, that can be part of the group end up being self selected to pass their genes on.

If you’re a contrarian, if you’re an outlier, if you’re a chimpanzee, that isn’t really going to be core to that social group, you’re probably not going to get a mate, you’re not going to pass those genes along. Am I oversimplifying or bastardizing that or is that just for the back in our conversation on? That’s three million, not 30,000 years ago.

BERNSTEIN: Yes, you — well that’s, that goes way back and as you say, it’s millions and millions of years ago. We seek status because it enables us to better — to make babies better, particularly if you’re male and particularly if you’re a male bull — bull elephant seal for example.


BERNSTEIN: But human beings have that same basic mechanism operating. That is why we seek status; it’s just a way of forwarding our DNA.

RITHOLTZ: NYU’s Scott Galloway talks about watches, he goes, everybody has a phone that’s far more accurate than an expensive timepiece, but it’s a way to signal that I can afford to take care of you and your offspring, and therefore these have not yet gone away.

BERNSTEIN: Yes, it’s the Birkin bag, exactly.

RITHOLTZ: And it just shows the ability to take care of the next generation?

BERNSTEIN: Well, yes. Yes, exactly. It shows that you’re able to muster resources. This is signaling …

RITHOLTZ: A signaling mechanism.


RITHOLTZ: So, who are some of your early mentors? Who affected the way you practiced medicine and then who affected the way you practiced finance?

BERNSTEIN: Well, it’s really difficult to point out who — at some point I decided I loved neurology and I guess there were some junior and chief residents who I glommed (ph) onto in my — when I was in medical school.

And I enjoyed the way they approached patients and I enjoyed the craft of neurology and I can think of a couple of names that no one will recognize, but there were basically — when you’re a medical student, a junior and a senior resident in a sub-specialty field is a god.


BERNSTEIN: And so, those are the people you tend to imprint upon. And then there were several different — several different groups of people. The one person who certainly a mentor to me was my wife who was an English major and she knew how to write and she taught me how to write.

RITHOLTZ: Did she edit your early work?

BERNSTEIN: She edits my early work and my middle work and my late work. She does — I will not send anything to a publisher without having her look at it. And she’s that good. And then, as far as finance goes, and finance writing, there was a person I’ve already spoken about, Frank Armstrong (ph) who encouraged me.

Another person was Scott Burns (ph) who was a writer for the Dallas Morning News, who still writes and still also manages money, who told me very forthrightly that I had what it took to be a financial writer.

That I was good with numbers and I could write pleasing pros and he said that I should purse that. And then two other people who helped me greatly along the way were John Rekenthaler, who is Chief of Research at Morningstar.


BERNSTEIN: And Jonathan Clements, of the Wall Street Journal, who very early on took an interest in me. And then they’re the people who I had only a very glancing knowledge of or almost knowledge of all, but who’s writing effected me, and of course, that’s the holy trinity of Bogle and Malkiel and Fama .

RITHOLTZ: If we we’re going to do a Mount Rushmore, all three have to go up there.

BERNSTEIN: Yes. And I got to know Jack Bogle a little bit personally, not very well, and then the other two I — well, and then Gene Fama I don’t really know at all, and I’d become friends to — with John Rekenthaler, he’s enormously helpful — he was enormously helpful to me.

RITHOLTZ: I’ve been trying to get Fama in here for a long time, so if you ever do happen to befriend him, send him my way.

BERNSTEIN: I will do.

RITHOLTZ: He’s — I’ve had the other half of that Nobel Prize, I’ve had Shiller in here, but Fama remains illusive and is only rarely glimpsed in the wild. He does not have much of a public face. So, you mentioned the writers that influenced you. Tell us about some of your favorite books, fiction, non-fiction, finance related, whatever.

BERNSTEIN: Well, fiction wise, I don’t read that much fiction, but there are two people who — or popular writing I should say, that I read compulsively and one of them is John le Carre. And the other is Michael Lewis, how often …

RITHOLTZ: Non-fiction, Michael Lewis is non-fiction.

BERNSTEIN: He’s non-fiction, of course, yes.


BERNSTEIN: And how often have both you and I had the experience of reading an article somewhere, New York or Atlantic …


BERNSTEIN: … wherever, and you say, god, this is really good, I wonder who wrote this, because you didn’t really pay attention who wrote it, and you go back and you slap your forehead, and of course it was Michael Lewis.

RITHOLTZ: So, I’m going to take it a step further. I always know who I’m reading. I no longer read massed heads. I don’t read the “New York Times” or the “Wall Street Journal” or the “Atlantic” or whatever, I read different authors. This is part of my reading evolution and so, I will read everything that Dan Gross or Michael Lewis or Jesse Eisinger, or go down the list, so I’d have a tendency to read. I cannot recall the last time I’ve experienced, who wrote this?

Oh, of course, it’s — I personally — I spend a lot of time on the internet and it’s a fire hose, so to make that manageable, I try — there are people, who whatever the put out, and certainly Michael Lewis is one of them, whatever they put out, I just have to read it.

BERNSTEIN: Yes. And then there are the three great books that I recommend to everybody. Number one is Expert Political Judgment by Phil Tetlock.


BERNSTEIN: About how what lousy forecasters we are, what mistakes we make and his section on the nexus between the media and pundits is required reading for everybody. There is a book called the Moral Animal, by a man by the name of Robert Wright, which gets to the heart of the origins of religion and morality and of human behavior. It’s a book basically about evolutionary psychology. It’s like Tetlock, it’s a very dense book.

And then finally, there’s a book which is — well, it’s both easier and more painful to read, which is a book by a British documentarian called Laurence Rees, R-E-E-S, called Auschwitz, A New History, and it is about the camp personnel who worked at Auschwitz and how they did what they did, why they did it and it basically explains to you errants (ph) fate and espinality (ph) of evil. The Germans were not exceptional, they were not an exceptional evil people.


BERNSTEIN: They were just convinced by everybody that the Jews were vermin, what do you do to vermin? And what I tell everybody that I meet these days, is that it’s a very short throw from vermin to rapists and murderers.

RITHOLTZ: Sure. Absolutely. It’s — I think that one of the things that have been revealed by the gas lighting we’ve seen over the past few years is that it’s not hard to fool a huge swath of the population into doing unthinkable things. It’s shocking easily.

BERNSTEIN: Yes, any people — any people can do it. Any — one of the — one of the most shocking things most things will stick in your memory from the Rees book, is that British officials in the Channel Islands, which were taken over by the Germans, it gladly handed over Jews to the Nazis.

RITHOLTZ: The Brits turned during World War II?

BERNSTEIN: The Brits during World War II.

RITHOLTZ: Wow, astonishing.

BERNSTEIN: Yes. And it’s also very useful when you’re thinking about financial fraud and financial malfeasance. If you understand Auschwitz, it’s very easy to understand what happened in Enron.

RITHOLTZ: Everybody bought into the whole company thing and despite obvious indicia fraud, they managed to overlook it. I know you mentioned the Fiat was a failure, but let’s talk more professionally. Tell us about a time you failed and what you learned from the experience.

BERNSTEIN: Well, the last two non-fiction books that had been published and sold were, one was a Splendid Exchange, which exceeded beyond my wildest expectations in terms of reviews, sales, the speaking gigs it continues to get me, it was just wildly successful. And then the book that came after that, Masters of the Word, which we talked briefly about, was an absolute flop, I doubt it sold 5,000 copies.


BERNSTEIN: Yes. And what that taught me is just how capricious publishing is.

RITHOLTZ: Are you equally satisfied with the final product?

BERNSTEIN: That’s the whole point, is I had just as much fun writing both of them, I’m just as proud of both of them, and what it taught me is that you can spend three or four years writing a book and it can disappear almost without a trace. And that doesn’t mean that the exercise wasn’t worthwhile, because hopefully you’re writing books for other reasons.

RITHOLTZ: What do you do for fun? What do you do when you’re not writing books or researching in the library?

BERNSTEIN: Well, I lead — I’m afraid, a very ordinary life. I’m your basic septuagenarian who enjoys his children and his grandchildren and traveling while I still can. I enjoy living in Portland, Oregon, more than I can image, more than you can image. I live in a place where I can walk downtown and be there in 15 minutes or I can walk 20 minutes uphill and be in a sequoia grove. And have had first class croissants and baguettes right out my front door.

RITHOLTZ: The food in Portland is outstanding. I don’t know if people realize that, that should be on the foodie city circuit, that every time I’m there I come away — that was really amazing restaurants. We have an office in Portland, it’s really astonishing, the food there.

BERNSTEIN: Yes, so I love that. And of course, the things that I really enjoy doing are the research, the process of putting a book together. It is just great fun under uncovering these stories that almost no one knows about.

RITHOLTZ: So, what’s the next book that’s going to be coming from you?

BERNSTEIN: The next book will be a modern remake, if you will, of Charles Mackay’s famous, Extraordinary Popular Delusions and the Madness of Crowds, or actually memoirs of Extraordinary Popular Delusions and the Madness of Crowds.

RITHOLTZ: Right. That’s got to be so much fun to dive into.

BERNSTEIN: Oh yes, and it’s a book, basically, that covers finance, of course, the three great bubbles of the 17th and 18th centuries, as well as a lot of religious manias, and so, that’s what this book is. It combines three things, is financial manias, religious manias and then the neuropsychology and particularly the evolutionary psychology that glues all of the together.

RITHOLTZ: One of the things that I learned from my colleague, Ben Carleson, who I know you know, was that the Japanese bubble that popped in 1989 made the Nasdaq in 2000 look like child’s play. It was like 5 or 10 X what the Nasdaq bubble was. It’s stunning.

BERNSTEIN: Yes, the NIKKEI peaked very close to 40,000 and I think that’s it’s at it’s nadir, it was somewhere around 5,000 …

RITHOLTZ: Seven — yes.

BERNSTEIN: … and I don’t know what it is now, but it’s somewhere in the mid-teens right now, I think.

RITHOLTZ: But it was the equivalent of the S&P 500 during the dot coms was about 32 times, I think the NIKKEI was 100 times earnings at it peak or even worse.

BERNSTEIN: Yes, very — very — very close to that and that’s what people always talk about, my gosh, can the U.S. stock market experience what happened to the Japanese stock market post 1989? And the answer is, it did, of course, in 1929 to ’32.

RITHOLTZ: Was the multiple that wildly out of whack?

BERNSTEIN: No, but the market fell by 88 percent.


BERNSTEIN: The S&P — the Dow Jones Industrial Average fell by about 88 percent. So, it was the same order of magnitude of fall. The reason why I think it’s unlikely, we’re unlikely to see anything happen to the U.S. market and why it’s more believable in Japan is simply because in 1999 we only had a P.E. of like — well, it’s trailing P.E. I think of 40 and a CAPE of 30 or maybe it was the other way around. A CAPE of 40 and a trailing P.E. of 30, whereas now we’re at a trailing P.E. of somewhere around 20 and a trailing CAPE of somewhere around 130 I believe.

RITHOLTZ: Something like that. Yes.

BERNSTEIN: Yes. So, it’s much more believable that that happened in Japan that it’ll happen to us.

RITHOLTZ: And the CAPE — the rub on the CAPE these days continues to be — it just gives you some insight into forward expectations, not a timing mechanism. It’s been overvalued since ’93, something like 88 percent of the time.

BERNSTEIN: Yes, the (inaudible) finance way of saying it, is that it’s not a stationary parameter, OK? Meaning that if you just look at how it works out of sample, it works very poorly out of sample.

In sample it works, but if you do, for example, what Staunton-Marsh and Dimson did, which is to look at it at, say the dividend yield, in multiple countries and then you just stop the analysis.

Each and every year you look back and you devise a set of rules depending — that are based on looking back at a given point. And then you look at how it does forward, it does very poorly going forward in almost all countries. The one thing that does work is, is timing within countries, but that’s a different subject.

RITHOLTZ: So, out of sample is a big warning …


RITHOLTZ: To take the CAPE with a whole lot of grain of salt?

BERNSTEIN: Exactly. Because you don’t know the future distribution is going to look like.

RITHOLTZ: All right, so our final two questions. If a millennial or recent college graduate came to you and said they’re looking for advice about going into either medicine and neurology or finance and writing, what sort of advice would you give them?

BERNSTEIN: Medicine is a much surer way of making a living than writing is, that’s for sure. I would — I tend to look at writing as something you do to amuse yourself in your dotage.


BERNSTEIN: It’s fun, but if you’ve got kids to raise and colleges to pay for, I wouldn’t become a writer, I would choose a much more solid profession, live modestly and then you can kick back and follow your bliss and write if you feel like.

RITHOLTZ: Are — I’ve asked a number of doctors this question and I’m curious as to your view, if your kids came to you and said they wanted a career in medicine, when they were younger, would you have encouraged or discouraged them?

BERNSTEIN: Yes, I would encourage anybody who wants to go into …


BERNSTEIN: … medicine. Yes, it’s a very rewarding profession and it’s a much more difficult profession than when I was in it because of all the bureaucracy.

RITHOLTZ: Right, insurance and what have you.

BERNSTEIN: And not only that, but back in the day you could work for yourself. Now, you’ll almost certainly be working for MBA from hell.


BERNSTEIN: Even so, it’s a fine profession; it offers rewards that nothing else — that no other professions will — that will provide you with.

RITHOLTZ: And our final question, what is it that you know about the world of investing today you wish you knew when you first started out 20-30 years ago?

BERNSTEIN: Well, there’s this parlor game that I like to play, about how risky your stocks. And we’ve all heard the rationales of how the get risky, or more or less risky with time and how that argument goes back and forth.

But what I’ve learned, that I wish I knew back then, is that it’s a stupid question to ask without also adding for a given investor of a given age, right? So, if you are a 20-year-old saver who has a lot of human capital and no investment capital …

RITHOLTZ: And a 50 year time horizon.

BERNSTEIN: Stocks aren’t the least bit risky. In fact, you should get down on your knees and pray for volatility and low returns, all right?


BERNSTEIN: But once you’re approaching your geezerhood (ph), stocks are Three Mile Island toxic and you should be very — approach them with great degree of caution. So, I wished I had known when I was 30-years-old that I could put 100 percent of my savings into stocks and not worry at all about them.

RITHOLTZ: That makes perfect sense. Bill, thank you so much for doing this. This has been absolutely fascinating. We have been speaking with Bill Bernstein, he is the author of numerous books.

Go to Amazon or Barnes and Noble or wherever you pick up your books and you can see any of the dozen or so offerings he has and I highly recommend any or all of them, A Splendid Exchange, it was really fascinating.

And because of that, I’m going to have to go get your book on media and words. I was — you said it came and went so quickly, I don’t even recall seeing that book come out, but this one I remember getting as soon as it published. So, thank you for your time.

If you enjoy this conversation, well be sure and look it up and enter (ph) down an inch on Apple iTunes and you can see any of the other 250 such conversations we’ve had over the past five years. We love your comments, feedback and suggestions. Write to us at

I would be remised if I did not thank the (inaudible) staff that helps put together these conversations each week. Madina Parwana is my audio engineer/producer. Michael Boyle is our producer/booker. Atika Valbrun is our project manager. Michael Batnick is our head of research. I’m Barry Ritholtz, you’re listening to Masters in Business on Bloomberg Radio.



Print Friendly, PDF & Email

Posted Under