WCI #107: The Four Pillars of Investing with Bill Bernstein, MD

This is the White Coat Investor Podcast where we help those who wear the white coat get a fair shake on Wall Street. We've been helping doctors and other high income professionals stop doing dumb things with their money since 2011. Here's your host, Dr. Jim Dahli.

Welcome to White Coat Investor podcast 107 an interview with William Bernstein, MD.

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Thanks so much for what you do. Your work is not appreciated enough. I know you're on your way into work, maybe your way home from work, maybe you're out running or you're at the gym, on a treadmill or something, maybe you're preparing food in the kitchen. I don't know. However you listen to these podcasts, but I know you've probably had a hard day at work in the last day or two and probably nobody told you thank you while you were there there. So let me be the one who thanks you for your patience. Sometimes they just don't thank you because they're too worried about the medical condition they have or they're too frustrated at the system that you and I both have to deal with and they do as well. So let me be the one to tell you thank you for them, for everything that you're doing and all the years of education, training you did, all the thankless nights that you did, all those calls you've taken. I appreciate what you're doing. Be sure to check out our list of disability insurance agents if you are in need of disability or term life insurance. This is a carefully curated list. It's not only curated by me, but by your fellow White Coat investors. When they have a bad experience or particularly good experience, they let me hear about it and I use that to mold the list over the years. And so these people that are listed on my Recommended Insurance Agents page on the website are are truly, truly good people that are doing disability insurance policies for hundreds of you every year. They really know their stuff. So rather than going and trying to find your own agent, use these people and save yourself a lot of worry. Be sure to also check out our Facebook group if you haven't yet. There are a ton of people in there. I think last count was well over 18,000. They are mostly physicians, dentists and their trainees. I think that's about 71% of the group. But there are other professionals in there, Both attorneys and APCs, pharmacists, et cetera, and some spouses of high income professionals. And so it's a broad group, but I'm amazed at how many people there are in there and the quality of the questions and the answers being given to the questions is continually rising. So if you haven't checked that out, it's called White Coat Investors. It's a private Facebook group. You do have to answer three questions to get into it, one of which says, yes, I read the rules, but if you are a high income professional and not a financial professional, we'll let you right into the group. If you're a financial professional, we'd love for you to sponsor the group. Of course. Our special guest today I am totally honored to have William Bernstein, PhD, MD is a chemist, a physician, a financial theorist, a blogger, the author of 11 financial books, and even a financial advisor. I first met Bill in person at the Bogleheads conference in 2008 in Dallas Fort Worth. Now at that particular conference, Jack Bogle was sick in the hospital. He was having some sort of issue with his heart and so he didn't actually make it to the conference. I think he spoke to us very briefly by video at the conference, but that was it. But it didn't even disappoint me because I was a Bernstein head long before I was a Bogle head. And so I was perfectly honored, just fine to be able to meet Bill Bernstein while I was there. One of his books, the Four Pillars of Investing, was certainly one of the first good books on investing that I ever read. I totally lucked into it and the used bookstore next to my house and it has had a huge influence on my financial outlook. Now whether that's his best book or not, I'll leave for you to decide. But it was the one that most impacted my life. So I wanted to bring Bill on the show and he graciously agreed. Just as he agreed to speak at the Physician Wellness and Financial Literacy Conference last year in Park City. And so I'm glad to have him here. All right, welcome to the show, Dr. Bernstein.

Pleasure to be here.

All right, I've read a lot of your writing and we had you out to the White Coat Investor conference in Park City, but I have never actually heard your story. So I'd like to start with you telling us your story. Your upbringing, your education and training, your career as physician, and the circumstances around you leaving medicine.

Well, the story which is that I began after completing my residency. I very quickly realized that I lived in a country that didn't have a functioning social welfare system, so I was going to have to save and invest on my own. And I approached it the way I thought anyone with scientific training would do, which is peer reviewed literature and the basic text. I collected data, I built models, and when I was all done, I realized that I had done something that not physicians had done, and it was a value to small investors, not just other physicians. And that's a long, shaggy dog story which you probably don't need to hear. But basically, once you publish books about finance, reporters start calling you up and you start getting coverage and then people start asking you to manage money. And so that's how I got into the money management business. And when I started writing about finance, when you publish books and when you start getting quoted in the national media, people will naturally enough ask you to start managing money, which I did. And one of the other things that I found is that when you write about finance, it is necessary to write about financial history and economic history.

Let's talk a little bit about the blog. You started a blog, the Efficient Frontier, a number of years ago.

Ago.

Can you tell us about the origin of that and what you hope to accomplish with it?

Well, that was part of my initial writing process. This gets to around 1995 when I decided that I wanted to write a book about what I had found my in my research. And so I wrote a book called the Intelligent Asset Allocator, which eventually did get published five years later, but of course it didn't get published right away. I sent away proposals to 30 different publishers and of course I got rejected in every single case. And so one of the people I was in contact with was a financial advisor by the name of Frank Armstrong in Florida, who was a pioneer on putting financial data and information on the web. He had done it probably earlier than almost anybody else. We're only talking about a couple years after the invention of the World Wide Web by Berners Lee. And he said, why don't you put your things on the web. And so I learned how to code HTML, and I set up a website, and I started publishing small articles that were basically formulated on the book that I had written. And by and by, I put the whole book on the web. And I found that I enjoyed writing short articles as well. And for a while, I would say between 1996 and, say, 2003 or 2004, for about 10 years, I was putting out about one article a month on the website. And that got a fair amount of attention in the press.

Yeah, I imagine it. It would. I mean, now there's lots and lots of blogs and certainly lots of financial blogs. I think there's even about 80 physician financial blogs that have been started at this point. But in the late 90s, that was not the case. A blog was a pretty rare thing. And so I think if you're willing to be out there, you're a pretty rare commodity.

I imagine the name wasn't even invented for another decade after I started doing it. I. It was only in, you know, the mid-2000s that I realized, oh, I'm blogging.

Yeah. And all these tools that we use to blog now didn't exist. You had to do your own coding at the time, too. I'm sure that was a little bit challenging. I imagine you couldn't just go read another blog on how to blog and learn how to do it.

Yeah. It's an illustration of the barrier to entry problem, which is you don't want to do something where the barrier to entry is very low. And back in the day, 20 years ago, the barrier to entry on the web was high enough that if you could do it, you were a fairly rare commodity.

So let's turn now to your books. I count 11 books that you've written. Did I miss any? Is that the right count?

I've lost count, but that sounds about right.

So I kind of divided them into four categories. I called them Investing for Beginners, Investing for Adults, the History books. And then I broke if youf can out into its own category. I'd like to take each of those categories in turn and talk about the books. These first three were the Intelligent Asset Allocator in 2001, the Four Pillars of Investing in 2002, and the Investor's Manifesto in 2010. Now, I think I've heard you say that each of these was an improvement and a simplification of the same message. What would you say that message is? And which of these books do you recommend to someone new to your writing?

Well, the message of the first Three books, especially for physicians, was really pretty simple and actually directed really towards physicians in particular. Although I didn't realize it at the time. The reason why physicians are such lousy investors is because they don't take finance and investing as seriously as they take medicine. Finance and investing is a very serious subject, just as serious as medicine is and just as involved. And you wouldn't think of practicing medicine without understanding the basics. Anatomy and physiology and pathology and pharmacology. And in the same way, you shouldn't be doing finance unless you understand those equivalents in finance. The equivalents of those four subjects in finance are the theory of investing, and we'll get to what that means in a minute. The history of investing in finance, the psychology of finance, and last but not least, the business of finance. The people you're going to be dealing with on the other side of your trades and the people providing you with your products. And that takes a little bit of effort. You know, we're talking about dozens if not scores of hours of reading and you shouldn't invest $1 with anybody until you've mastered those subjects.

So which of those books would you recommend to someone who has never read any of your books?

Well, it depends upon what your math skills are. The history of the three books was I wrote the first one, the Intelligent Asset Allocator, because I thought I was writing a book for the average investor. And it turned out that what I had written was a book that was really for the average engineer because it was a lot of math in it. And so I simplified it into the four pillars of Investing. But even a lot of people found that one to be overly complex. I mean, my neurology Partner has a PhD in molecular biology, so she's a pretty smart lady. And even she told me, hey, this stopped me cold in a couple of places. So that was the genesis of the last book, which was the Investor's Manifesto, which basically strips out all the math and is pretty descriptive. So it really depends upon who you are. If you're a math whiz and you enjoy statistics and you enjoy higher level math, then read the Intelligent Asset Allocator. If on the other hand, you despise math and you don't think you're good at it, go for the last book, the Investor's Manifesto. I think that the most rounded out book though is the middle one is the Four Pillars of Investing. If you can ignore the math in it, you're still going to be pretty well rewarded.

Now, of those four pillars, which would you say is the Most important.

That'S a very hard question, but I would say the psychology of investing. It turns out that human beings are just not wired for finance. And the way I explain that is that we evolved in a state of nature where the risks that we faced were second to second. You know, the flash of yellow and black in your peripheral vision, the hiss of the snake and the, you know, it's a second to second thing. Whereas the risks that we face in the modern world stretch out over decades and we're just not wired to deal with them. And that's really what destroys most people's ability to execute finance in the long run. And so you have to understand just what those reactions are and how to overcome them.

Now, the next four books I want to talk about, not necessarily the next four you wrote, but the next four, I think, you know, breaking these up into a reasonable order, are the Investing for Adults series that you wrote from 2012 to 2014. These are shorter books that assumed a basic knowledge of investing on the part of the readers. These included Ages of the Investor, Skating to Where the Puck Was, Deep Risk and Rational Expectations. What were you trying to accomplish with these books and should we expect to ever see another in the series?

Probably not. What I was doing was playing with self publishing and trying to figure it out. And it's a very rewarding way to write about finance. But I probably won't be using that particular platform unless I decide to write another big finance book. The way it started was I had developed some things that I wanted to say and I wanted to talk about Life Cycle Investing, which I had thought some more about after I'd written my books. But I had thought about what is the real nature of risk in the long run. And then I wanted to write a book for professionals that warned them about herding and about a lot of trends that I saw in investing at the professional and institutional level. That bothered me. I realized after I had written those three books, which are respectively the Ages of the Investor and Deep Risk and the Skating where the Puck was, that basically they were, you know, they could be folded into a successor book to the Intelligent Asset Allocator. The Intelligent Asset Allocator is now almost 20 years old. And I decided at that point that it was time to write another version of the book. So I folded all of those three subjects, plus the subject matter of Intelligent Asset Allocator, into a full length book which I also sell online called Rational Expectations. Those four books are basically aimed at what I call investing adults, which are people who have mastered the four subjects that I talk about, and it's really aimed more at professional investors than individual investors. The term investing adults is a bit sardonic because I've met some 15 year olds who are investing adults and I've met a ton of 75 year olds who are investing infants. It really, when I say investing adult, I'm talking about somebody who has an adult approach to investing.

Now, how do you think the best way for somebody to assess whether they're an investing infant or an investing teenager or investing adult is. I mean, how can you know?

Well, that gets to the very last book that you mentioned that I wrote, which is if youf can. If youf can is available for free. You just have to put that in quotes into Google, put my name and you'll be able to download it. And it's about 10,000 words. It'll take you at most an hour or two to read. And if the, the subject matter that's written about in that, in that little pamphlet is familiar to you, you're an adult. And if the subject matter isn't familiar to you, you're not an adult. And the booklet provides a roadmap towards becoming an adult that's very helpful.

And actually a book I recommend all the time, not only because it's free and very accessible, but anybody can get through 16 pages. You know, if you can't get through that, you have no business whatsoever having anything to do with managing your own money.

Yeah. Including employing somebody else to manage your own money for you. If you can't comprehend and grasp that particular pamphlet, then you're a walking patsy.

Yeah, there's a lot of truth to that. Now, the next three books deal with history. There's 2008, a splendid exchange, the Birth of Plenty that came out in 2010, and Masters of the Word in 2013. Now, I confess I've only read two of these three. I've read Splendid Exchange and the Birth of Plenty of and I think they're excellent at helping develop one of those four pillars of investing, a knowledge of the history of finance and markets. But tell us a little bit about Masters of the Word, how media shaped history, and why you thought it was important to write.

Well, I'm at that point in my life when I only do things that are fun. And one of the things that I found is fun that I find is fun that very few other people find is fun. Fun is I enjoy writing long form nonfiction. And really long form nonfiction is about organizing your own reading. If you enjoy leisure time reading, then the way most people do it, and it's partially how I do it, is you just. You read book reviews, you get recommendations from friends, and it's sort of aimless. All right, you're not really. Or it's really. You're not really reading in an organized fashion. I find that it's much more rewarding. Rewarding to explore a single subject in depth. Now, the reason I wrote Masters of the Word was because when I wrote Splendid Exchange, I came across a fascinating story about the repeal of the corn laws in 1846 in England. And this was a legislative action in the House of Commons that basically destroyed a lot of the wealth and the power of the landed gentry in England. And it benefited greatly the other 99% of the population who had to eat the grain that was produced on that land. It basically reduced tariffs on imported grain, which protected the landed aristocracy. And the way that it happened was that the man who effected was a man by the name of Richard Cobden. And he was able to muster public support for the repeal of the Corn Laws, these tariffs, by using the penny post, the new postage system that the English government had just set up. And he also was able to use the railroads, which was also what was behind the penny post, to travel around and organized. And so I realized that in a world where only the wealthy can communicate and travel, everybody else is disempowered. And if you go through the history of mankind, you find that that is a recurrent story. So, for example, you go back thousands of years when literacy rates were extremely low, you know, a percent or two, and you find that there's this very small elite of scribes in Egypt and in Mesopotamia who basically run everything. What happens in Greece and the reason why democracy develops in Greece is because the Greeks invented this very simple Alphabet, just 22 letters with consonants and vowels that a 6 year old could learn. And so the literacy rate in Greece among male citizens was probably in excess of 30 or 50%, which was just sky high. All right. For that period of history. Well, where does democracy develop? All right, so it's a story of that interplay between communications technology and power. And there are lots of other very important examples of that throughout history. I've decided to write about that.

I'm looking forward to picking up that one. That is the kind of book I would enjoy reading. Now, let's turn a little bit away from your books. You started a financial advisory firm, efficient Frontier Advisors, LLC. When did you start that?

1998. That was about the time I had gotten onto The Internet. And I was starting to, you know, develop a media presence. And when you write books about finance, when you start publishing articles, when you have a website, when you start getting quoted in, you know, the Wall Street Journal or Money magazine, people will naturally ask you to manage money. And, and one of the people I had encountered on the Internet was a financial advisor by the name of Susan Sharon, who already had an established practice. And we got together and we've been in business ever since for the past 20 years.

So are you still working as a financial advisor? Is the firm still in business?

Oh, yes.

I don't think you've accepted new clients for a long time. And I was on the website a couple days ago and it said the minimum investment was 25 million, which would certainly preclude most of my listeners from hiring the firm anyway. But what was the main reason you wanted to start the firm and what were you hoping to accomplish with it?

Well, in the first place, our minimum is no longer 25 million. It's infinity. We're not taking new clients. But I enjoy managing money and it's nice to be able to make a living doing it. It's just that simple.

Let's turn now to some of the more controversial topics in finance. I want to give listeners the opportunity to hear your opinions on these topics. You're a firm believer that future stock and bond returns are likely to be lower in the future than they have been in the past. In fact, in the foreword you wrote for my first book, you said, the bad news is that today's young physicians, Jim included, won't be as fortunate. While I've just told you that it's impossible to make financial forecasts, this is true only in the short term. It's actually pretty easy to estimate the future returns of both stocks and bonds in the long run, say over the next 20 to 30 years. For bonds, it's very simple. Their expected return is the interest rate, which as we all know, is very low at the moment. And for stocks, it's only slightly more difficult. Simply add the stock market dividend rate, currently about 2%, to the long term average, a per share dividend growth of 5%, to give an expected return of 7%. Neither of these, unfortunately, is going to match the double digit returns earned by investors in previous decades. Now, that was about five years ago. And over the last five years, the Vanguard total stock market funds returned 10.3% and the total bond market fund has returned 2.7%. And while five years is hardly the long term, stocks did provide Double digit returns. Were you surprised by that?

Oh, not at all. What you have to realize is just how much uncertainty there is incorporated into that estimate. And the easiest way to talk about it is to imagine you think that the long term returns of stocks are 7%. Well, the thing that I haven't told you is that the standard deviation of those stock returns of 7% is about 15%. So if you go two standard deviations up, two standard deviations down, which is the 95% confidence limits, then you've got a possible return over one year of plus two standard deviations, which is 37% or minus two standard deviations, which is minus 23%. That's why it's a fool's errand to try and estimate stock returns next year or next month. Now, the longer the period of time you go out, the more certain that becomes. So for example, let's take a 49 year period. Why 49 years? Because the square root of 49 is 7. And the way you do the math is you take that 15% and you divide it standard deviation and you divide it by 7. So now you've got 2%. All right, so now you've got plus or minus two standard deviations over almost a 50 year period, which gets you to a possible high of 11% or a possible low of about 3%. All right, which gives you a lot more certainty. But certainly over a five year period, a return of 10.3%, which is just barely double digits, shouldn't surprise you at all.

Now, your prediction for bond returns was spot on. It was basically exactly what the yield was five years ago.

Yeah, again and again, you know, it's two things. Number one is bond returns are a lot less noisy. In stock returns are. Number two, you're looking at the dumb luck. All right? You know, a lot of people who make predictions that are wildly accurate or wildly inaccurate are for that reason. It's really due to the uncertainty and how lucky you are in your guess.

Now, in four pillars of investing, some of your sample portfolios included tiny allocations to gold and or gold mining stocks. Do you think that's an asset class worthy of inclusion in a portfolio today? And if so, which investors should consider it?

It's really appropriate only for a very small subset of investors. You have to realize that the return of precious metals equities, I don't recommend investing in gold, I recommend investing in precious metals equities. And the reason for that is it's horribly volatile. So it means that if you have it as a constant percent of your portfolio, then you're fairly often going to be selling high and buying low. If you say you make it 2% of your portfolio, then it's going to move very wildly with respect to the other 98% of the portfolio. And so to keep it at 2%, when it does really, really well, which is a lot of the time, you're going to be selling a lot of it. And when it does really, really well, your buying a lot of it. And there's sort of. That sounds very attractive and very salutary. It's emotionally very hard to do because this is an asset class which at least two or three times in the past 50 years has lost three quarters of its value. All right? And to be constantly rebalancing and buying feels like throwing money down a rat hole. In the long run, it works, but it requires an enormous amount of discipline. And quite frankly, the benefit of owning just 2% of it in your portfolio is. Is not that great. So I only recommend it for people who meet two criteria. One is they're really interested in finance and they're really into spreadsheeting their investments and rebalancing very, very clinically and technically. And number two, people who have the emotional discipline to deal with that kind of volatility, which quite frankly, not a lot of people qualify on.

Let's talk for a minute about factor investing. What are your thoughts on factor investing? For example, do you believe that small and value stocks are likely to outperform the overall market over the next 30 to 50 years?

I think the answer to both of those questions is probably yes. The problem is that this is one of those things that everyone now knows about. And so the prices of value stocks and of small stocks have been bid up a bit. And so I think that the rewards for doing it in the long run are not going to be as great as they were in the past. I think that for the average physician, you're probably better off just sticking with the total stock market.

What about some of these other factors out there, like low volatility or momentum? At what point do these dozens or hundreds of factors just become artifacts of data mining?

Well, that's. You've put your thumb right on it. There's an finance academic by the name of John Cochran at the University of Chicago who very famously labeled all of these newly identified factors as the factor zoo. And I think he identified something like 500 of them. And most of them are due to data mining. The most famous example of data mining was a fellow by the name of Hank David Leinweber, who basically mined the OECD database and found that butter production in Bangladesh was very predictive of the movements of the S&P 500. All right, well, that was purely an accident and I don't think anyone in their right mind would base their investment decisions on that. And I think that a lot of returns to factor investing are in that category. If you mine enough factors, you're going to find something that worked.

Yeah. And obviously won't carry forward, since it was only luck that it was a factor in the past.

Exactly.

What are your thoughts?

Let me talk about the one last one. The one of them that I think that I don't recommend investors pursue, but I think is a real factor is momentum. So stocks that have done well in the past six months or year tend to do better going forward. The problem with that is the premium you get from doing that is that it's an enormously expensive one to mine because you're turning over your portfolio very rapidly and that carries costs. Not only transactional costs, but if it's in a taxable account, you're also generating huge amounts of capital gains.

What are your thoughts about low cost actively managed mutual funds such as those available from Vanguard?

Well, you know, I think that if you're going to invest in actively managed funds, then you should be investing in the ones with the lowest expense ratios. The problem is that even the cheapest actively managed funds are more expensive than passively managed funds. So I'm not wild about them, but if you have to. If someone put a gun to my head and said, you've got to invest in actively managed funds, I would pick the ones with, number one, the lowest fees, the lowest expenses, and number two, the lowest turnover.

Let's talk about real estate for a minute. Do you see a role in a portfolio for real estate above and beyond a simple REIT index fund?

What I like to say about investing, and I presume you're talking about commercial or residential rental real estate, is that it's not an investment, it's a job. So, you know, if you enjoy dealing with drug addled and potentially heavily armed tenants and fixing toilets, then I say go do it. You can probably make a lot of money doing it and it'll be a good diversifier in your portfolio. But I don't think most normal people want to be landlords.

What do you think about some of these opportunities that are somewhat more passive than that, but not quite? An index fund, for example, you know, these opportunities available to accredited investors to buy syndicated apartment complexes with 100 other investors or to buy into a private real estate fund. What are your thoughts on those investments?

I think that those are products that are sold and not bought. I think they're usually pretty opaque, they're not liquid. And the overall experience, long term overall experience in people in those kinds of vehicles is poor.

Do you think there's a premium there for being willing to be illiquid?

Not really. I mean, theoretically there's an illiquidity premium, but I think that in the real world the track record of these things is pretty miserable.

Jack Bogle passed away recently. Can you describe his influence on you personally and on the industry?

Yeah, I mean, it's sort of like, you know, that question is kind of like asking about the influence of Charles Darwin on the study of evolution. I mean, he basically, he didn't invent the efficient market hypothesis, but he's the one who put it into practical use. So I guess the proper analogy would be the Wright brothers didn't invent the internal combustion engine, but they applied it to powered flight. And that's exactly what Jack Bogle did. He took the concept of, of passive investing, which to that point had been a theoretical construct of people like Paul Samuelson and Gene Fama and Bert Malkiel, and he brought it to the general public. And for that he deserves to be remembered forever.

Now, you've always been somewhat critical of the financial services industry and particularly its fees and conflicts of interest. Let me read back two quotes here from you. 99% of fund managers demonstrate no evidence of skill whatsoever and you are engaged in a life and death struggle with the financial services industry. If you act on the assumption that every broker, insurance salesman and financial advisor you encounter is a hardened criminal, you will do just fine. Do you think the industry is improving or getting worse in this regard over your career?

I think it's getting better. Not much better, but I think it's getting better. You're not seeing quite the frequency of overtime abuses. The day of the stockbroker who is cold calling clients and taking their existing clients and having them trade actively in and out of stocks on the basis of really no useful information is slowly fading. It's still there. You still see those kinds of practices, but they're not nearly as frequent. People are investing more in passive investments and low cost mutual funds, even the ones that are actively managed. And so I think things are slowly improving. So the answer to your question is yes, a bit.

Now, despite the problems of the industry, you've also said this, and I've got two other quotes here. No one in his right mind would walk into the cockpit of an airplane and try to fly it or into an operating theater and open a belly. And yet they think nothing of managing their retirement assets. I've done all three, and I'm here to tell you that managing money is in its most critical elements, the quota of emotional discipline and quantitative ability required even more demanding than the first two. And the second quote. A decade ago, I really did believe that the average investor could do it himself. I was wrong. I've come to the sad conclusion that only a tiny minority, at most 1%, are capable of pulling it off. Heck of Helen Young Hayes, Robert Sanborn, Julian Robertson, and the nation's largest pension fund funds can't get it right, what chance does John Q. Investor have? Do you feel the same way? Do you think the vast majority should have a financial advisor? And if so, what can an investor who feels capable and has his own written financial plan do to know if he's in that 1% or not?

Well, the trick is everybody should endeavor to get into that 1%. And if everybody endeavored to get into that 1%, the figure might be more like 10 or 20. And so I look at the problem on two different levels. Number one is, particularly for this audience, there's no reason why someone who's smart enough to get into medical school can't master the four pillars of investing as I describe them. That's not a plug for my book, by the way. And if you can, I describe what the four pillars are, and I don't recommend one of my books because I think it's cheesy to recommend your own books. So you don't have to read any of my books to understand how to do this. And so I think that the average physician is certainly capable of doing it for him or herself. The trick is, it's going to require a lot of effort. Now, when you broaden out that question to the general population, I think that our entire system of retirement savings is colossally stupid. I think that, you know, it's just a fool's errand to expect the average person who is flipping our burgers or taking care of our kids or, you know, pressing our coffee at Starbucks. To be able to invest competently in their 401 plan is about as logical and about as sensible as expecting them to fly their own airplane or open their own belly.

Let's turn a little bit to kind of a relatively recent market event that I thought was absolutely fascinating to watch. In October 2017, you told CNBC that you didn't think bitcoin was yet in a classic bubble. Over the eight weeks after that, it quadrupled in value, only to burst and then provide its investors with a -83% return in 2018. Truly, it was the closest thing to a tulip mania or a South Seas bubble that has existed in my short 15 year investing career. What lessons can we learn from the bitcoin bubble?

Well, first of all, I plead bad luck. You know, if they had asked me four or eight weeks later, I probably would have given, or at least I hope I would have given, a very different answer. That was, I was asked that question just at the point where it was about to take off. And when I said that, I basically posited four criteria that I had for identifying bubbles. Number one is when something becomes a topic of everyday conversation, when you go to a party or a social engagement and people are talking about how wealthy they're getting trading bitcoin or tech stocks or real estate, that's a sign that you're in a bubble. The second sign that you're in a bubble is when people quit perfectly good professions to day trade or to trade mortgages or securities. And we saw that, of course, during the late 90s when I saw medical doctors and lawyers quit what they were doing to day trade. Number three is when you express skepticism about a particular investment and you get really angry responses. When skepticism is met with vehemence, that's a third sign. And so the most famous example of that with Bitcoin occurred a little later when a very famous tech entrepreneur said that if bitcoin didn't go to $500,000, he would perform an act on national television for which he'd probably be arrested. And then finally, number four is when you start seeing extreme price predictions. So when people say that the price of something is not just going to go up or down by 20%, which is the typical sort of prediction you have for the stock market, but the prices are going to quadruple or fall by a factor of four. That is the sign of a bubble. And at the point that I was asked that question, none of those four criteria were present, but they certainly were present four to eight weeks later.

Yeah, it was amazing how quickly it happened. It was like watching the tech boom and burst in rapid time. I thought it was absolutely fascinating. What was amazing to me is that most people didn't seem to recognize it. They didn't seem to think that was bizarre at all, that the value of something had quadrupled in eight weeks.

Yeah. You know, a few weeks after I was at your conference in Park City, I was down in San Francisco at a conference of high school teachers on financial education for young people. And one of the questions I got asked at that point point was about bitcoin. And the teacher who asked the question just happened to remark that their students were speculating in bitcoin. And both my jaw dropped. And Jonathan Clements, who was sitting next to me, who was also at the Park City conference, his jaw dropped too. And one of us asked. I forget which one of us asked. Well, show of hands, how many of your students are investing in bitcoin? And probably two thirds of the teachers in that room raised their hand. That's a pretty sure sign.

Wow. Speaking of that Park City conference, what did you think of that experience coming out and speaking to a bunch of doctors?

It was great fun. I was very impressed with the other speakers that you had, particularly the young radiologist who talked about burnout. I wished I had heard that talk, you know, 30 years ago, particularly her advice for dealing with the MBA from hell.

Yeah, you're talking about Dr. Nisha Mehta, I think. I think that was her.

Very impressive young woman. Yeah.

So I've got a few questions that I put out a call on Twitter to people that wanted me to ask you questions. So I've got a handful of these I'm going to give you without any preparation whatsoever. But I think most of them are pretty softball. One was what's a personal example of when you didn't follow your own advice?

Ah, well, really, what you're. What that really a better way of phrasing that question, at least in terms of my experience, is what stupid things did I learn from that? I did. And I invested in palladium futures at a very early stage in my career. I invested in mutual funds based on their prior performance. And in every single case, I had my head handed to me when didn't I follow my own advice? Probably not being rigorous enough in my process. Not being mathematical enough in my process. My own personal investments. I do have to admit that when I invest client money, we're extremely rigorous. We're very mathematical, we're very rules based about it. I'm not quite as rules based in my own personal investing, and I probably should be more rules based.

That brings us up to the next question. This one comes from Dusty on on Twitter, who asks, what is the breakdown of your investments by asset class?

Well, you know, I'm a geezer and so I don't have a lot of human capital ahead of me. I have a fair amount of investment capital. So I'm less than 50, 50 stock bond. I think at the present time my own personal investments are 45, 55 stocks and bonds and they're very heavily value and small based. And I'm a little overweight in foreigns because I foreign stocks because I think that they're cheaper, which is, you know, precisely what we do for clients.

Now we've got a couple of questions on a relatively current event that's in the news, particularly with the Democratic primary starting to ramp up a little bit. Vaughn asks. I'd love his perspective on student debt and loan forgiveness. And I have another similar one about your opinion on the student education debt funding model and if that's our next debt bubble and what you think of Elizabeth Warren's solution to the crisis.

Okay, well, let's deal with those question by question because I hear three or four questions there. The first question I think I heard, and correct me if I'm mistaken, is what do I think generally of debt forgiveness and of the magnitude of student debt? I think that's the first question.

I think that's a fair summary. Yes.

Yeah. And I think that it's a national scandal. My medical school tuition was $1,550 a year and I came out of medical school with virtually no debt. I think I had $300 worth of student debt, not 300,000, $300 of student debt. And so there's this enormous generational injustice that we're dealing with. You have users like me who benefited greatly from the system, to say nothing of low security prices and high subsequent returns. And then, you know, you've got this generation of younger people coming out of school who are essentially indentured servants and who have no prayer of discharging that debt. I mean, they can't. You can't, you know, as you well know, you can't declare bankruptcy and get out of the problem the way you can with, with most debt. So I think we have to rectify that, which gets to Elizabeth Warren's proposal, which I think has a lot of merit and I think needs to be seriously considered if I can get into a little bit of politics. There are a lot of truly scandalous things about this particular presidential administration. But I think that Betsy DeVos is the poster child for exactly what we're talking about. As far as I can tell, she is in the back pocket of the private universities and the debt servicers and really does not have the interest of the nation's young people at heart.

Now, let's turn a little bit away from politics and we'll take another question, this one from Patrick, who asks your opinion on a safe withdrawal rate.

Well, you know, the old safe withdrawal rate was 4%. And it really depends upon your age. You know, let's take two extreme examples. Let's take the person who is, say 30 years old, who's just inherited or come into a huge amount of money and who isn't going to be working. Well, that person's safe withdrawal rate is probably not much north of 2%. All right? Whereas if you take someone at my age, probably who is just starting to withdraw and I'm 70, the safe withdrawal rate is probably about 4.5% or so. I think for the average retiree, the person who wants to retire at age 60, I think it's somewhere around three or three and a half percent. The old answer was 4%. And the only way that that worked was because security returns going forward were so high, I don't think they're going to be high enough to sustain that from now on.

All right, one last one off Twitter. This one from Gary, who asks what's been a change in your thinking in the last few years?

The biggest change that I have is how I've thought about the long term risk of stocks. People in finance, and particularly finance academics, play this parlor game of do stocks become more or less risky with time? And I'm not going to bore you with all of the pros and cons of that, but the consensus of opinion is the stocks actually become more risky over time. And there are a number of theoretical reasons why you should believe that. But to me, it's a really, it's a stupid question unless you qualify it by asking what's the age of the investor? Or at what point in the life cycle of the investor are you. So if you're a young person, you look at your capital, almost all of your capital is human capital. It's your future earnings. Your investment capital is going to be relatively small. The risks of owning stocks and purchasing stocks periodically as part of a saving plan are relatively small. In fact, if you are a young investor, you should get down on your knees and pray for a lot of volatility and lousy returns so you can accumulate the stocks in your portfolio for your retirement at low prices. All right, so for a young person, stocks aren't particularly risky and they should not be afraid if they can tolerate it emotionally, to invest nearly 100% of their savings into stocks on the other hand, you have a person in my position who is not going to have a lot of future earnings, who's going to be living off their investment capital. And that person has to be a lot more cautious about stocks. If a person who is 70 years old has 100% of their assets in stocks and then stocks lose 50% over a 10 year period and you're withdrawing 3 or 4% of the after 10 years, you know, you may be living under a bridge now.

I think we're starting to push an hour here, so we're going to have to wrap this up soon. But I wanted to give you the chance. I mean, I presume this podcast is probably going to be listened to by somewhere between 20,000 and 30,000 high income professionals like doctors. This is your opportunity to tell them anything else you think they ought to know about their investments, careers, finances, etc.

Well, I would just reinforce what I, what I, you know, said a couple times throughout the podcast. It's to an audience of physicians, it's extremely important, which is that, you know, somebody else said to me very recently, you know, if you went into a doctor's office and you saw General Hospital playing, you would run out, you know, yelling and screaming from that doctor's waiting room. And it's the same way with finance. If you are getting your finance information from the Wall Street Journal or Kiplinger's or cnbc, that's like getting your medical information, your medical background from USA Today. All right. Treatment. Treat finance as seriously as a serious field of study as you would treat medicine. And you know, there's a roadmap for doing that, which I put out. And if you can, that you should, that you should follow. If you aren't familiar with finance, if you're not treating finance as seriously as you treat medicine, you shouldn't be doing it.

Thank you so much. And we'll have links to all of his books as well as that free pamphlet, if you can, on the podcast Notes. So be sure to check those out. Dr. Bernstein, thank you so much for your time and for coming on the podcast today.

It was my pleasure, Jim.

All right. That was wonderful having Bill on the podcast. I cannot recommend his books more highly. If you haven't read his books or if you've only read one or two of them, there's still a lot of great information out there that is worth your time to read. I liked him so much that I included one of his books in the swag bag for the White Coat Investor conference in Park City. We gave everybody the investors manifesto that showed up to the conference, so be sure to check those resources out. We'll have links to them in the show. Notes if you're still looking for disability insurance or you just need a second opinion on whether your policies are any good, check out our list of recommended insurance agents. You can find it on the main website whitecoatinvestor.com under the recommended tab. Most of them will give you a second opinion for free, and if you find out that you're really inadequately covered, they can help you get the policy that's perfect for you.

Getting quality disability and life insurance should be the first financial chore for a doctor to complete. Most docs don't have the ideal policy for their gender, specialty, state or health status, and one in seven doctors get disabled at some point during their career. Because these policies can only be purchased through brokers, we put together a list of vetted agents who are experienced with working with the specific needs of medical professionals and who have your best interest at heart. If you have questions about insurance and what kind of policies would be the best fit for you, check out our insurance recommended list@whitecoatinvestor.com insurance and feel the peace of mind that comes with knowing you have the optimal policy in place. You can do this and the White Coat Investor can help.

Head up, shoulders back. You've got this. We can help. We'll see you next time on the White Coat Investor podcast. My dad your host, Dr. Dahl, is a practicing emergency physician, blogger, author and podcaster. He is not a licensed accountant, attorney or financial advisor, so this podcast is for your entertainment and information only and should not be considered official personalized financial advice.