#60 - William Bernstein - “The More Comfortable You Are Buying Something, in General, the Worse the Investment It's Going to Be"

59 minutes

In Episode 60, we welcome the great William (Bill) Bernstein.

Bill starts by giving us some background on how he evolved from medicine to finance. In short, faced with his own retirement, he knew he had to learn to invest. So he studied, which shaped own thoughts on the matter, which led to him writing investing books, which resulted in interest from the press and retail investors, which steered him into money management.

After this background info, Meb jumps in, using one of Bill's books "If You Can" as a framework. Meb chose this as it starts with a quote Meb loves: "Would you believe me if I told you that there's an investment strategy that a seven-year-old could understand, will take you fifteen minutes of work per year, outperform 90 percent of financial professionals in the long run, and make you a millionaire over time?"

The challenge is the "If" in the title. Of course, there are several hurdles to "if" which Meb uses as the backbone of the interview.

Hurdle 1: "People spend too much money." Bill gives us his thoughts on how it's very hard for a large portion of the population to save. We live in a consumerist, debt-ridden culture that makes savings challenging. Meb and Bill discuss debt, the "latte theory," and the stat about how roughly half of the population couldn't get their hands on $500 for an emergency.

Hurdle 2: "You need an adequate understanding of what finance is all about." Bill talks about the Gordon Equation, and how investors need an understanding of what they can realistically expect from stocks and bonds - in essence, you really need to understand the risks.

Meb steers the conversation toward investor expectations - referencing polls on expected returns, which are usually pegged around 10%. Using the Gordon Equation, Bill's forecast comes in well-below this (you'll have to listen to see how low). The takeaway? Savings are all the more important since future returns are likely to be lower.

This leads to a great conversation on valuation and bubbles. You might be surprised at how Bill views equity valuations here in the U.S. in the context of historical valuation levels. Bill tells us to look around: Is everyone talking about making fortunes in stocks? Or quitting good jobs to day trade? We don't see any of these things right now. He's not terribly concerned about valuations.

Hurdle 3: "Learning the basics of financial and market history." Meb asks which market our current one resembles most from the past. Bill tells us it's a bit of a blend of two periods. This leads to a good discussion on how higher returns are more likely to be coming from emerging markets than the U.S.

Hurdle 4: "Overcoming your biggest enemy - the face in the mirror." It's pretty common knowledge we're not wired to be good investors. So Meb asks the simple question why? And are there any hacks for overcoming it? Or must we all learn the hard way?

Unfortunately, Bill thinks we just have to learn the hard way. He tells us "The more comfortable you are buying something, in general, the worse the investment it's going to be."

Bill goes on to discuss the challenge of overconfidence and the Dunning-Kruger effect (there's an inverse correlation between competence and belief one has in their competence). Meb asks if there's one behavioral bias that's the most destructive. Bill answers with overestimating your own risk tolerance. You can model your portfolio dropping 30% and think you can handle it, but in when it's happening in real time, it feels 100% worse than how you anticipated it would.

Hurdle 5: "Recognize the monsters that populate the financial industry." Basically, watch out for all the financial leeches who exist to separate you from your money. Bill tells us a great story about being on hold with a big brokerage, and the "financial porn" to which he was subjected as he waited.

There's way more in this episode: Bill's thoughts on robos... What Bill thinks about any strategy that moves away from market cap weighting (Bill thinks "smart beta" is basically "smart marketing")... How buying a home really may not be a great investment after all... Cryptocurrencies... and even Meb's "secret weapon" of investing.

All this and more in Episode 60.

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