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 –