Efficient Frontier Advisors Co-Founder & Neurologist Bill Bernstein

Barry speaks with Bill Bernstein, neurologist, investor, author and co-founder of Efficient Frontier Advisors about his unique career path from science to finance and how he uses lessons learned in neurology and applies them to investing. Bill also shares his thoughts on the current economic and political environment and his thoughts on how to navigate uncertainty in markets. See omnystudio.com/listener https://omnystudio.com/listener for privacy information.

Speaker names marked ? are inferred from speaking time and the show’s known hosts — they are not voice-verified.

• 0:00Speaker 00

  At K K R, we've spent 50 years understanding what matters to our clients and companies. From pioneering private equity to investing across credit, real assets, insurance and sports, K K R has built the experience to navigate complexity, the judgment to recognize opportunity, and the conviction to create lasting value. Because when people and institutions are counting on us, understanding what matters isn't just important, it's everything. K K R, understanding what matters. Visit K K R dot com slash what matters.

• 0:31Speaker 01

  This is the Bloomberg Tech Minute brought to you by Chat G P T. I'm Carol Muster. Getting hired at SpaceX requires exceptional ability and may include having Elon Musk review a candidate's resume. So writes Bloomberg Business Week's Lauren Grush. She reports that the company culture is defined by Musk and job candidates must understand that a commitment to SpaceX means adhering to this culture and exhibiting loyalty to Elon Musk. To get hired, candidates must demonstrate their achievements from past jobs and hands-on experience matters more to recruiters than advanced degrees, with the company looking for people with raw innate intelligence. A spokesperson for SpaceX didn't respond to a request for comment on its recruiting

• 1:13Speaker 01

  and hiring practices, but according to recruiters, advisors and those who've interviewed for jobs there, it's the space exploration dream that draws people to the company and Musk invokes that dream regularly to remind workers why they're there. Prospective hires are told that the job will require stamina, including in job ads that candidates quote "must be willing to work extended hours and weekends as needed." One major perk for all that hard work? Employees' access to equity, either the right to buy shares or payment in the form of restricted stock units that vest over time. That's the Bloomberg Tech Minute brought to you by Chat G P T. Get started at Chat G P T dot com.

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• 2:26Speaker 03

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

• 2:40Barry Ritholtz?

  This week on the podcast, another banger. Bill Bernstein, neurologist, investor, author. What a perfect time to talk to the author of The Birth of Plenty and of course, a splendid exchange about how trade has made us all so much wealthier. Really, a person who dives deep into the subject matter, understands it better than anybody else, and could put it into great historical context. I thought this conversation was fascinating, and I think you will also. With no further ado, my discussion with Bill Bernstein of Efficient Frontier Advisors. So you have such a fascinating career.

• 3:21Barry Ritholtz?

  I want to, I want to get into some of the details before we start talking about markets and investing. You practiced neurology for, for 20 years? That's kind of unusual to say. I've had enough of that. Let me start managing assets. Tell us about that transition.

• 3:39Speaker 05

  Well, first of all, it kept me off the streets. And secondly, I'm, I'm easily bored, so I do move from thing to thing. And it occurred to me, oh, about 40 years ago, that I live in a country that doesn't have a functioning social safety net. And so I was going to have to invest and save on my own account to accomplish that. And I approached it the way I thought anyone with scientific training would do, which is, I consulted the peer review literature, I read the basic texts, I collected data, I built models. And by the time I had done all that, I realized I had something that was useful to other small investors. And so I began to write things up.

• 4:23Speaker 05

  And I discovered that when you're writing about investing, one of the key subjects that you have to nail down is the history of finance. If you don't know the history, you're dead in the water. You know, can you spell long-term capital management?

• 4:38Barry Ritholtz?

  Just LTCM.

• 4:39Speaker 05

  Yeah, exactly.

• 4:39Barry Ritholtz?

  You don't need to spell it.

• 4:40Speaker 05

  Yeah. Yeah, I mean, you know, you can, you know, solve differential equations as easily as most people brush teeth, but if you don't know the history, you're going to have your head handed to you, which is what happened to them. So I discovered that I enjoyed writing history, and so that's how I segued into, into writing history.

• 4:57Barry Ritholtz?

  And footnote, Roger Lowenstein's When Genius Failed is so instructive, not just because of the things you're referring to, failing to learn from history, the danger of leverage, and, you know, tiny inefficiencies, but it was also a cautionary tale that was ignored a few years later led right to the great financial crisis, the same mistakes.

• 5:19Speaker 05

  Yeah, there, there's a historian by the name of Robert Kaplan, who said that all of history is half geography and half Shakespeare. And when I heard that, it resonated, I realized that investing is the same way. It's half mathematics and half Shakespeare, and you have to manage, you have to master, master both of them. If you can't master both, you're, you're, you're dead in the water.

• 5:43Barry Ritholtz?

  Literally, my next question, you describe, you describe it as half mathematics, half Shakespeare. Some people would call that art and science, but tell us why you need both compounding and exponential mathematics and the Bard to be successful as an investor?

• 6:00Speaker 05

  Well, it gets to what I call the prom queen theory of life, which is that if

• 6:04Barry Ritholtz?

  Wait, wait, the prom queen theory of life?

• 6:08Speaker 05

  Indeed. If you're the prom queen, then the most important thing in the world is how you dress and how you, how you look, and that's how you judge other people. Brains, athletic ability, political ability, don't matter. Well, financiers are exactly the same way. If you're, the peak of your skill set is your quantitative ability, that is how you judge other people. And if other people can't understand your models, then they're stupid. All right?

• 6:34Barry Ritholtz?

  That's gay.

• 6:35Speaker 05

  You have to, you know, the conceit of finance is that basically, the math is all there is to it, and that you don't have a limbic system. They deny the existence of their, of their emotions and their psychology. And that's what gets them into trouble. They don't understand the history and how that feeds into mass fear and mass greed and mass delusions, which is why I wrote that particular book.

• 6:57Barry Ritholtz?

  Kind of reminds me of the Richard Feynman quote, imagine how much harder physics would be if electrons had feelings.

• 7:04Speaker 05

  Exactly.

• 7:04Barry Ritholtz?

  So, so interesting. So, since we mentioned Shakespeare, I have to ask the obvious question, what writers and investors have influenced how you invest and how you write?

• 7:18Speaker 05

  Oh dear. Well, Jim Grant, of course, would be at the top of anyone's list. And then the person who's right at the top of that list was a Scottish guy who lived almost 200 years ago, Charles Mackay, who wrote Extraordinary Popular Delusions and the Madness of Crowds, or actually Memoirs of Extraordinary Popular Delusions and the Madness of Crowds. And he described all of the things that we've been seeing, you know, over the past couple of decades, more than 200 years ago.

• 7:47Barry Ritholtz?

  So those are two well-known names. Jim Grant is really best known as a macro analyst and a fixed income investor. How has Grant influenced how you look at the world of investing?

• 8:02Speaker 05

  Well, he's also a historian. You know, he's written several historically deep books, particularly about Bernard Baruch. But he certainly, you know, describes the historical episodes of manias and panics. I guess the other one would be John Kenneth Galbraith, whose history of 1929 crash was non-peril. I mean, it was just absolutely superb. You know, it's one of those books that you just can't help but, you know, snickering out loud with every paragraph.

• 8:33Barry Ritholtz?

  And, and he has probably coined more quotes and phrases that other people unknowingly steal and don't credit him because they're just the essence of truth and wisdom.

• 8:45Speaker 05

  Yeah, especially, you know, whenever anybody talks about innovation in finance, he describes it as reinventing the wheel only in slightly more unstable form.

• 8:55Barry Ritholtz?

  That's pretty amusing. We briefly talked about if it's in the headlines, if it's above the fold in the paper, it's already in price. So you're a proponent of modern portfolio theory and the efficient market hypothesis. How efficient? How much do market prices truly reflect future discounted cash flow?

• 9:17Speaker 05

  Well, Samuelson once wrote, I think in a private letter, that the markets were micro-efficient but macro inefficient. And what he meant by that, by micro-efficiency, was that, as the both of us know, it is brutally hard, and getting harder by the day, to pick stocks and time the market. If you don't know that, you're in big trouble. But the markets are also, can be macro inefficient. So the overall markets can overshoot in one direction or the other. It's very hard to, almost impossible to figure out exactly when that's going to happen. You can look at a market that's ebullient and frothy,

• 9:57Speaker 05

  and you can say, I know what's going to happen, I just can't tell you when. So that, to me, is the best explanation, or the best description of macro and micro-efficiency there is. But, you know, I mean, my message to anybody who's 20 years old, or 25 years old, and just coming out of their education, and think they're going to be the next Warren Buffett, the bad news is, you're trading against Warren Buffett.

• 10:22Barry Ritholtz?

  That's right. That's right. I have been told that markets can stay irrational longer than you can stay solvent.

• 10:30Speaker 05

  Yeah, that's an apocryphal quote from Keynes, yeah.

• 10:33Barry Ritholtz?

  Right. But not really. I don't believe he ever said that. Certainly never wrote it.

• 10:38Speaker 05

  No, he never said it, or wrote it.

• 10:40Barry Ritholtz?

  So, speaking of apocryphal times, you have said investors should build their portfolios for the worst 2% of market conditions, rather than normal times. Tell us why you believe that, and how do we go about accomplishing that?

• 10:57Speaker 05

  Well, that directly falls out of Charlie Munger's dictum, which is that, yes, compounding is magic, but The first rule of compounding is never to interrupt it unnecessarily. And you're most liable to interrupt compounding, to panic and sell during the worst 2% of times. So you design your portfolio for the worst 2% of times, which means that it should be more conservative than you think it should be the other 98% of the time. And it's a suboptimal allocation to have less stocks is suboptimal. But what I like to say is that a suboptimal allocation you can execute is better than an optimal one you can't execute.

• 11:39Barry Ritholtz?

  No doubt about that. You mentioned someone 2025. There are a number of people who have said, and I've been swayed in this direction. Hey, when you're 20, 25 years old and you don't need this money for 30, 40, 50 years, do you really need bonds to offset the volatility of equities? Shouldn't you be 100% equities at that age?

• 12:02Speaker 05

  Theoretically, yes. Practically, no. Because there are a few sentient beings in this quadrant of the galaxy that can tolerate 100% stocks.

• 12:12Barry Ritholtz?

  Huh, really, really interesting. So you mentioned half math, half Shakespeare. Let's talk about the math side. So when you started looking at investing and bringing a scientific rigor to the process, you created your own set of asset class databases. This is before CRISPR and other widely available databases. Tell us how you went about doing this.

• 12:36Speaker 05

  Oh, no, no, I stole it from them.

• 12:37Barry Ritholtz?

  Oh, you did?

• 12:38Speaker 05

  Yeah, I mean, I went out and spent.

• 12:40Barry Ritholtz?

  Full disclosure.

• 12:41Speaker 05

  Yeah, yeah. No, I mean, I mean, what did I do? I went out, I did what anybody would do in that situation, which I spent $90, $95, which seemed like a king's ransom at the time.

• 12:50Barry Ritholtz?

  Right.

• 12:50Speaker 05

  For the Ibbotson yearbook. And I transcribed all, you know, 985 data points into a spreadsheet, which I just learned how to use, you know, sometime around 1990. And then that's, that was the start of my models and the other people provided me with data. Ken Fisher, bless his soul, supplied me with a fair amount of data. And I, you know, impersonated a professional investor at certain large banks and was able to get data sets from them as, as well.

• 13:19Barry Ritholtz?

  By the way, I, I find Ken Fisher to be one of the more fascinating people in finance because.

• 13:28Barry Ritholtz?

  Not only did he bring a writer's perspective, I think he was the longest-running Forbes columnist at like 43 years, some crazy number, writing a monthly column for them. But he was both an investor and a very accomplished business person in terms of, like, he was early in direct mail, he was early in the internet, he was early in, just as running a business, just throwing stuff against the wall, seeing what stuck, and just A/B testing, iterating on a continual basis, long before Google started doing that online.

• 14:06Barry Ritholtz?

  He was one of the early people who developed, here's what financial asset management marketing should look like.

• 14:15Speaker 05

  Yeah, indeed, he did all those things, and he's also a superb writer and observer, and I think you interviewed him.

• 14:22Barry Ritholtz?

  A couple of times.

• 14:23Speaker 05

  Yeah, once or twice, maybe once memorably.

• 14:26Barry Ritholtz?

  Well, there was that, sure.

• 14:29Speaker 05

  And, you know, he said something on one of your interviews that stuck with me, you know, for the past 20 years, which is that he pays close attention to the headlines, because he knows that if something is above the fold, it's already been impounded into prices and can be safely ignored.

• 14:44Barry Ritholtz?

  That's exactly right. I thought you were going in a different direction. The first time, quick digression, the first time I interviewed him right in the studio, he was kind enough to do an interview with me in the first year of the podcast, which was, you know, admittedly, pretty terrible. I was very rough around the edges. And I, it was very formal and rigorous, and tell us about small cap, and tell us about emerging market value, and it was really on the, you know, just kind of straight down the line and really boring. And afterwards, we're having a conversation. How's the new firm going? Pretty good. We're a few hundred million dollars, blah, blah, blah.

• 15:26Barry Ritholtz?

  You know, we come in second very often on some of these big households. And he said to me, wait till you're five years old and a billion dollars in assets under management and the world will open up to you because no one with real money wants to give, you know, a small firm with no history, a big chunk of cash. And we just started talking about how the business ran and how he delegated authority and how he built stuff. And I'm sitting there listening to them, listening to him and saying to myself, idiot, this is the conversation, not the small cap nonsense you just spent an hour chatting about. And when he finished schooling me, I said, can you come back one day and we'll discuss that because this is fascinating.

• 16:11Barry Ritholtz?

  And he goes, sure, anytime. So a year later, we came back and had the conversation we should have had. He has always impressed with me with how insightful and unique his perspective is. I mean, we're all a little neurodivergent. He has his issues, I have mine, but I just find him to be an absolutely fascinating guy.

• 16:33Speaker 05

  I mean, if we can get into just a little bit of neurophysiology.

• 16:36Barry Ritholtz?

  Sure.

• 16:36Speaker 05

  There's something called the.

• 16:37Barry Ritholtz?

  Well, you happen to be a neurologist, so let's, let's have at it.

• 16:40Speaker 05

  There's something called the default mode network, uh, which is a part of your brain that becomes electrically active, uh, when you're at rest and which turns itself off when you're doing any, uh, focused task. And it turns out you can locate it anatomically on imaging studies and people who have well-developed, anatomically well-developed default node networks tend to be very good at reading other people, uh, and have good emotional intelligence. The opposite of that is in people who are on the spectrum, who have small default mode networks and are not good at reading other people.

• 17:16Barry Ritholtz?

  And so he kind of blown, by the way, the firm has done fine. They've recovered from his stumble. I don't know if it was even pre pandemic. And I thought he kind of got slagged by a lot of people unfairly. The guy has been a public figure for 45 years. He's been at least writing in public for all that time. You know, sometimes stuff happens and in a sort of social media gotcha environment.

• 17:44Speaker 05

  Yeah, to say to say nothing of being a spectacularly effective environmentalist.

• 17:49Barry Ritholtz?

  So on our last interview with him, we talked about all the the trees and woods that he has purchased and put into permanent conservation. He's done giant studies on sequoias and redwoods. I think he's one of the leading experts in a specific type of tree known in the Pacific Northwest. He's really like a wildly fascinating guy, and I hope people don't judge him for that. I mean, I don't know what to call it, that politically incorrect snafu. I don't think he meant it in any other way, and it, you know, they kind of had to reel him in a bit.

• 18:29Barry Ritholtz?

  But the firm is doing fine. His firm is doing fine. And there was like about a $5 billion outflow. But when you're 105 or 110 billion dollars, all right, you got to dance with who brought you there. He built it up to that. But I find him to be really an interesting guy.

• 18:46Speaker 05

  Yeah, and he has the address here on Lexington, so he knows where to send the chocolates.

• 18:52Speaker 00

  At K K R, we've spent 50 years understanding what matters to our clients and companies. From pioneering private equity to investing across credit, real assets, insurance and sports, K K R has built the experience to navigate complexity, the judgment to recognize opportunity, and the conviction to create lasting value. Because when people and institutions are counting on us, understanding what matters isn't just important, it's everything. K K R, understanding what matters. Visit K K R dot com slash what matters.

• 19:24Speaker 01

  This is the Bloomberg Tech Minute brought to you by Chat G P T. I'm Carol Muster. Getting hired at SpaceX requires exceptional ability and may include having Elon Musk review a candidate's resume. So writes Bloomberg Business Week's Lauren Grush. She reports that the company culture is defined by Musk and job candidates must understand that a commitment to SpaceX means adhering to this culture. And exhibiting loyalty to Elon Musk. To get hired, candidates must demonstrate their achievements from past jobs. And hands-on experience matters more to recruiters than advanced degrees, with the company looking for people with raw, innate intelligence. A spokesperson for SpaceX didn't respond to a request for comment on its recruiting and hiring practices.

• 20:07Speaker 01

  But according to recruiters, advisors, and those who've interviewed for jobs there, it's the space exploration dream that draws people to the company. And Musk invokes that dream regularly to remind workers why they're there. Prospective hires are told that the job will require stamina, including in job ads that candidates, quote, "must be willing to work extended hours and weekends as needed." One major perk for all that hard work? Employees' access to equity, either the right to buy shares or payment in the form of restricted stock units that vest over time. That's the Bloomberg Tech Minute, brought to you by ChatGPT. Get started at ChatGPT.com.

• 20:47Barry Ritholtz?

  I think I'm going to begin with a quote that I stole from Bill to start a chapter of my new book. "To the extent you succeed in finance, you succeed by suppressing the limbic system. Your system one, the very fast-moving emotional system. If you cannot suppress that, you are going to die poor." I love that quote. Is it an exaggeration or is it accurate?

• 21:13Speaker 05

  No, it's extremely accurate. Let me tell you a personal story. I have a good friend who is a wealthy person. And that has enabled this person to have a career in public service. And she's done very, very well. And one day, after I'd known her for many, many years, she told me that her sister was poor. All right? Or did not have a lot of money. And I said, I don't understand this. Was she disinherited? Did she make the family angry? And she looked me straight in the eye and she said, no, she was afraid of stocks.

• 21:49Barry Ritholtz?

  Really?

• 21:50Speaker 05

  Yeah. And so that's the difference. If you can suppress that fear, you will do very well. And if you can't suppress the fear, then you probably will die poor.

• 22:01Barry Ritholtz?

  So it's so fascinating you said that. You must have a similar situation. I live in liberal New York. You live in liberal Oregon, right? But we have clients that are on the left and the right. And so anytime you put out a commentary on current affairs, not only because you don't want to offend half your clients, but because it's a good analytical strategy to try and go down the middle, be objective and fact-based, but whatever your personal bias is, keep it out of it. And I wrote something up about what are the best and worst-case scenarios about the tariffs? And we'll talk a ton later about tariffs. But the fascinating thing is, when you look

• 22:44Barry Ritholtz?

  at history and you look at a chart of everything that's happened, go back 100 years, go back to 1926, there's always a reason to sell stocks. Year in, year out, there's always some spectacularly crazy news that says, this is going to be terrible, I want to sell. And if you're selling in response to headlines, and you're going to wait for the dust to clear, by then it's too late. You've missed most of the recovery. How do we deal with that never-ending threat, that persistent, this time is different sense? And current affairs, the headlines today, does it feel like the tariffs are different? Or is this no different

• 23:27Barry Ritholtz?

  than the great financial crisis, the pandemic, the dot-com implosion? Go down the list. To say nothing of the Kennedy assassination, 9/11, like, there are endless reasons to be panicked about what's going on in the world.

• 23:42Speaker 05

  Yes, this time certainly was different. Never before in American history has a colossally incompetent American president tried to crater the economy. And it's very different.

• 23:53Barry Ritholtz?

  Do you think that was his purpose? Is he like, hey, we caused a recession, rates come down, and that's good for real estate?

• 23:58Speaker 05

  I think, and we've talked about this one, the Rosetta Stone of Donald Trump is a call-in show he did with Howard Stern, along with his daughter and his son, Junior. And And Howard looked at him and said, "Quick, multiply six times seventeen." All right? None of the three of them could do it.

• 24:20Barry Ritholtz?

  Hundred and two, how hard is that?

• 24:21Speaker 05

  Well, that's the whole point. And, and, you know, Don Jr. laughed, he thought it was funny. Ivanka said, "Oh, no, you don't have to be able to do math to do real estate."

• 24:32Barry Ritholtz?

  Or investing for that matter.

• 24:33Speaker 05

  And, but the most interesting response was Donald's. He said, "No, it's a hundred and twelve." And he argued with Howard Stern about whether it was a hundred and two or a hundred and twelve.

• 24:42Barry Ritholtz?

  Six times ten is sixty, six times seven is forty-two, sixty and forty-two. I, I, I mean, that's how I do math in my head, I don't know how you do it.

• 24:50Speaker 05

  Yeah, yeah, there's, yeah, that's one way to do it. Or you might know that three times seventeen is, is fifty-one, okay?

• 24:55Barry Ritholtz?

  And then you could double it.

• 24:56Speaker 05

  Double it, exactly. And, and so this is a math problem that, you know, a reasonably bright middle school student can handle. None of the three Trumps could do it, okay? And so this is the guy who's now directing our economy. So that's different, all right? Well, how different was that from nine eleven? All right, nine eleven was sure different.

• 25:16Barry Ritholtz?

  I, I mean, arguably, George W. Bush isn't the sharpest tool in the, in the box. Barack Obama had no national experience whatsoever, had no idea how really the national apparatus worked. You could do this on both sides to some degree. You're saying, this time really?

• 25:35Speaker 05

  Oh, yeah, yeah, yeah, this is, this is, this, this is completely, there were, there were adults in the room during the Bush presidency, and there were adults in the room during the first Trump presidency, they're all gone now.

• 25:46Barry Ritholtz?

  And yet, the market continued to go higher during the first Trump presidency regardless of who was president.

• 25:52Speaker 05

  Because they took him, uh, literally but not seriously.

• 25:56Barry Ritholtz?

  Other way around.

• 25:56Speaker 05

  Oh, yeah, okay, the other way around.

• 25:58Barry Ritholtz?

  Seriously but not literally.

• 25:59Speaker 05

  Literally, yeah.

• 25:59Barry Ritholtz?

  This time, I think we should be taking him literally but not seriously.

• 26:02Speaker 05

  Yeah, yeah, that's, that's right.

• 26:04Barry Ritholtz?

  Right?

• 26:04Speaker 05

  I got it reversed, exactly, yeah.

• 26:05Barry Ritholtz?

  The great, so, we talked earlier about the efficient market hypothesis. So, to be fair to the president, he's been talking about tariffs his whole adult life. He says tariff is the most beautiful word in the dictionary. He says, "I'm tariff man." Why were the markets so surprised by liberation day when here's a guy who has?

• 26:29Barry Ritholtz?

  Told you I'm going to implement big, beautiful tariffs in my second term. Why did the market have to adjust revenue and earnings expectations down substantially after April 2nd if the market's so efficient?

• 26:44Speaker 05

  Well, I think that the reason why is because he didn't do 90% of the other things he said he was going to do. He was going to repeal Obamacare and give us a big, beautiful healthcare system. He was going to redo our infrastructure. He was going to establish peace in the Ukraine on day one. And I think that his-

• 27:05Barry Ritholtz?

  Bring down the price of eggs?

• 27:07Speaker 05

  Yeah, exactly. And I think that his, you know, promise on tariffs just got put in the bin with the rest of the stuff he obviously wasn't going to do and didn't do.

• 27:17Barry Ritholtz?

  But I think people did take him seriously. They did expect, you know, the sort of muscular US foreign policy and take tough, you know, a tough stance with the Middle East, a tough stance with the Russia-Ukraine war, and he's going to bring prices down. That's why I believe most of his non-hardcore supporters voted him. I think a lot of people were kind of surprised by what he's done. Are you suggesting that we should not be long-term investors and step aside? Or do we just have to ride this out?

• 27:57Speaker 05

  No, I think that it's, this time is different in the same way that all the other times were different. I mean, you know, October 19th, you know, 1987, boy, that was sure different. We've never seen that before and we've never seen it since. And the smart thing to do on October 20th of 1987 was to buy stocks.

• 28:17Barry Ritholtz?

  Right. So when you see, not that you had time, like I was hoping we would be down, I don't get excited about down 8% to 10%, but down 20%, you've got my attention. I want to start legging into more equities. We never quite got there on the S and P, right? I think, what, we down 18%, 17%, something like that?

• 28:36Speaker 05

  Yeah, and it was the same thing with, you know, late March. Of 2020. Boy, that was fast.

• 28:41Barry Ritholtz?

  Thirty-four percent, seventeen days.

• 28:43Speaker 05

  Yeah.

• 28:43Barry Ritholtz?

  So if you were looking for down twenty, you got it. You just only had a day or two to react.

• 28:49Speaker 05

  Yeah, I don't, you know, I try to stay away from correction, ten percent bear market, twenty percent. To me, that's numerology. There's no difference.

• 28:56Barry Ritholtz?

  A hundred, you and I know, you know, I find the base ten, like, wait, you have ten fingers and ten toes? So twenty percent is a bear market? There's just no data that supports that.

• 29:07Speaker 05

  No, there's no difference between the market being down nineteen percent and down, being down twenty-one percent. You got, it behaves the same way in both cases.

• 29:14Barry Ritholtz?

  Arguably, if, so maybe I should make our rebalance bands instead of being down twenty percent. Maybe it's down sixteen percent. So you get executed and then add a second one down twenty-four percent.

• 29:26Speaker 05

  Yeah, until you get to, you know, March of, of two thousand, of oh nine. And there you've rebalanced, you've thrown all your cash in three different times.

• 29:35Barry Ritholtz?

  And, but, you know, if you've thrown away your cash, it kind of works out. The, the really, the really strange thing about bear markets, and I'm, my frame of reference is not just two thousand to twenty thirteen. But the Dow kisses a thousand in nineteen sixty-six, and it doesn't get over it on a permanent basis till nineteen eighty-two. And if you just continue to dollar-cost average for those sixteen years, or from two thousand to twenty thirteen, when the market finally got over all its previous highs, that's when you start to make a ton of money.

• 30:12Barry Ritholtz?

  Because that next cyclical, I'm sorry, that next secular move, all those bad buys you've made over the past ten years, suddenly they start flowering.

• 30:23Speaker 05

  Yeah, there's this academic parlor game we're both aware of, which is the argument is do stocks get riskier with a longer time horizon? And the correct academic answer is, yes, they do. But the assumption there is that you're a buy-and-hold investor, all right? But there are other kinds of investors besides buy-and-hold investors. If you are a, a periodic saver, you're a young person who's putting

• 30:49Speaker 05

  Money away, then stocks are really not all that risky for the reason you just gave. On the other hand, if you're a retiree and you have no more human capital left, then stocks are Three Mile Island dangerous. You are, you know.

• 31:04Barry Ritholtz?

  You have to explain what that means to a younger generation.

• 31:07Speaker 05

  Yeah, there was a nuclear, there was a nuclear accident, which was sort of the junior early version of Chernobyl at Three Mile Island outside Harrisburg, Pennsylvania. There was a movie that was, that was parodied.

• 31:18Barry Ritholtz?

  Jane Fonda.

• 31:18Speaker 05

  Yeah, yeah, the China Syndrome.

• 31:20Barry Ritholtz?

  That's right.

• 31:21Speaker 05

  And, and, and so the point being that if you're an older person, stocks are, are risky. And you could say, if you're, you know, like me, you don't have a lot of human capital left. Well, five out of six times, stocks have higher returns in bonds. So even in retirement, I should have plenty of stocks. And that's like saying that when you play Russian roulette, five out of six times you win.

• 31:45Barry Ritholtz?

  I guess five out of six times, but that, that, that sixth time is a doozy, isn't it?

• 31:51Speaker 05

  Exactly. It's, it's, it's all about asymmetric consequences. It's if you're, if you're invested too heavily in bonds and you should have been invested in stocks. Well, you don't get to fly first class. You don't get to buy the Beamer. But on the other hand, if you invest too heavily in stocks and you're wrong, then you're bunking with your kids.

• 32:09Barry Ritholtz?

  Right. If, if you're an older investor and you don't have that time horizon.

• 32:12Speaker 05

  Right.

• 32:13Barry Ritholtz?

  Yeah, someone, someone said to me, can you really look through the next four years? If you're not retiring for 10 or 20 years, or if your kid's five, 29, they're not going to school for 10, 15 years. And that's the easy question. The challenge is what happens if you're retiring in 25, 26, 27? Right? In, in the next three years, you know, that sequence of returns problem is, is really thorny. I, I think it was Bill Sharp said it's one of the most difficult problems in all of finance. How much do you draw down each year? We all use 4% as an average, but how much do you draw down each year? If your first couple of years of retirement is down five, down 10, down 20%?

• 32:56Speaker 05

  Yeah, there's this wonderful, wonderful little bit of. Work done by Mike Ketsis and Wade Fow about, you know, the reverse glide slope, glide slope, which is you actually raise your equity allocation the further into retirement you get. And that just, if you think about it logically, it just falls right out of that. Your first debt, your first five, 10 years of retirement, you want to be fairly conservative just for that reason. And then when you're 80 years old and you know, you'll be pushing up the daisies in, in five or 10 years, then you can be more aggressive because you don't need that much of a liability matching portfolio at that age.

• 33:29Barry Ritholtz?

  Huh. Really, really, really interesting. So you wrote a short book called Deep Risk, talking about different types of risk. Explain what is deep risk? What is shallow risk?

• 33:40Speaker 05

  Well, shallow risk is the way we normally think about risk. There's this theoretical finance dogma that risk is the same as variance or standard deviation. And the problem with that is that's only true in the short term, the short-term volatility. And short-term volatility is not of any real importance to the long-term investor. The real risk of long-term investing is not having enough assets to pay for your living expenses five, 10, 15, 20, 30 years from now. So what are the things, what are the, what are the events that can, that can impair that? Well, the big one's inflation. Inflation, hyperinflation in particular is extremely common. It is almost the rule rather than the exception.

• 34:26Barry Ritholtz?

  Really?

• 34:26Speaker 05

  Sure. You, you look, all you have to do is ask yourself, what unit of currency that would buy yourself something in the year 1900 can still buy yourself something today? Well, the US dollar can, can still buy yourself something. Okay. Can buy you something. A Japanese yen sure can, and it can't, an English pound can, and a Swiss franc maybe can buy you a candy bar if you find the right store in Geneva, or more likely, Bern. And, and so, you know, those, you know, the, the case of the yen and the, the French franc and the German lira are much more common than the US dollar and the Swiss franc and the English pound.

• 35:05Barry Ritholtz?

  German Deutschmark, Italian lira?

• 35:07Speaker 05

  Exactly.

• 35:09Speaker 05

  Exactly. Yeah. I mean, you start with, you know, a Reichmark in the year 1920 and by 1923, late 1923, you were down to one trillionth of its purchasing power. That's that's hyperinflation. So that's the rule. So that's the most common thing that you have to worry about. And that is, relatively speaking, the easiest one to defend against. Now, there are other three other things

• 35:32Barry Ritholtz?

  Well, wait, before you go to the other three things, how do you defend against that?

• 35:35Speaker 05

  Uh, well, first of all, in the US, we have these marvelous instruments called TIPS. And all you have to do is worry about, you know, the Department of Labor rejiggering the inflation adjustment, which is something to worry about. But of all the worries you can have, that's a relatively small one.

• 35:54Barry Ritholtz?

  We went through that with Michael Boskin already rejiggered how we calculate

• 35:58Speaker 05

  Right.

• 35:58Barry Ritholtz?

  cost of living adjustments. Rather than debating this like adults politically, they just made some, I'm not a big fan of substitution or hedonic adjustment. When when steak gets too pricey and you substitute chicken, that just means I've been priced out of steak, not that this is the equivalent.

• 36:17Speaker 05

  Yeah, exactly. I mean, it is. It is a problem. But of all of the asset classes that protect you with the greatest surety against the decrement in your future consumption, loss of your future consumption, TIPS do it better than anything else I can think of. All right?

• 36:34Barry Ritholtz?

  Really interesting.

• 36:35Speaker 05

  Stocks do a relatively good job of it. You know, Elroy Dimson likes to point out that stocks are an inflation head simply because of their high returns. But they're also a claim on real assets. You know, companies own real estate, they own equipment, they have human capital, and those retain real value.

• 36:54Barry Ritholtz?

  Plus, stocks are, their revenue and profits are in

• 37:00Barry Ritholtz?

  Dollars, so at least in the U.S. So if there's inflation, the cost of their goods go up and and their total dollars. Maybe their profits get squeezed, but everything seems to rise in an inflationary environment on the equity side, right?

• 37:14Speaker 05

  Right. And then there's certain kinds of stocks that are especially good at protecting against inflation. Value stocks do. Why? Because they tend to be overly leveraged. And with inflation, their debts tend to get inflated away. And so that flows to their bottom line. So if you look, for example, at the period that we just talked about from sixty six to eighty two, value stocks actually outperform the market by a and inflation by a very good margin. And then finally, there are commodities producers. In an inflationary environment, the petroleum stocks, gold stocks, base metal producers are all going to do fairly well, at least relatively well to the market. And then finally, you know, on

• 37:58Speaker 05

  the bond side, for God's sakes, keep your keep your maturities short, as we found out in twenty two.

• 38:03Barry Ritholtz?

  I I noticed when you talked about real assets, you did not discuss real property. How does real property do as an inflation hedge over time?

• 38:12Speaker 05

  It's pretty good. But what I like to say about real estate is that it's not an investment, it's a job.

• 38:18Barry Ritholtz?

  Yeah, for sure.

• 38:19Speaker 05

  If you if you if you if you enjoy dealing with drug-addled tenants and fixing toilets, then be my guest.

• 38:26Barry Ritholtz?

  Okay, I wasn't I wasn't thinking of rental properties. I was thinking of the various REITs and offices and paying a professional to to manage it. So you're not getting the two a.m. call that the toilet is overflowing.

• 38:40Speaker 05

  Yeah, but then by the time you're investing in public REITs, you're back in the stock market again.

• 38:43Barry Ritholtz?

  Right. So there's no no difference. Really, really, really interesting.

• 39:10Speaker 01

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• 41:05Barry Ritholtz?

  I was kind of fascinated by a data point you shared, talking about old master paintings. Imagine if you bought a Rembrandt for $100, and 350 years later, you sold it for $10 million. The return was a little over 3% a year. That's astonishing.

• 41:27Barry Ritholtz?

  All these paintings look like they've appreciated so much. Tell us about the math behind these paintings that go for 10, 20, 30 million dollars.

• 41:36Speaker 05

  Well, it's really, it's really not about finance or math. What it's about is human neuropsychology. We are particularly bad at exponential calculations. And, you know, it's the old thing that even the, they knew back in the, in the Far East that, you know, the emperor asks the artisan or the farmer what he wants. He says, well, put one grain of rice on the first square of the chessboard. And by the time you get, of course, to the

• 42:03Barry Ritholtz?

  Double at each, each square.

• 42:04Speaker 05

  By the time you get to the 64th square, he's the wealthiest person on the planet. Human beings are not good at that, and that's all that that's a demonstration of. Now, if you want to get into the academic finance of it, it's that art has value in investment, has investment value, but it also has a complementary value, which is its aesthetic return. And Bill Baumel did the research on, on this, the late Bill Baumel of NYU did the research on this and figured out that art had a much lower return than stocks or bonds, simply because of its aesthetic return.

• 42:43Barry Ritholtz?

  Makes a lot of sense, and that's before we get to the whole survivorship bias, that you only see the most famous paintings in the world and their price tag, the tens of thousands of other paintings that aren't auctioned off each year, we don't see their return.

• 43:00Speaker 05

  To say, to say nothing of the maintenance and insurance and security costs of keeping the art as well.

• 43:05Barry Ritholtz?

  No doubt, no doubt about that. It's funny, because you have this whole group of investing books, and then you also have this separate group of really fascinating historical books about markets and the economy and global trade. Let's start with the splendid exchange. It's so perfect for the moment we're in.

• 43:30Barry Ritholtz?

  What is the history of of trade and how has it helped raise everybody's standard of living?

• 43:37Speaker 05

  Well, it just gets down to Adam Smith's concept of specialization. Nations specialize and nations have and people have an intrinsic tendency to, as he put it, truck and barter. They want to trade one thing for another. So, you know, the one of the great luxury commodities of the 17th century was the pineapple. If you look at the coats of arms of all these European aristocrats, about a third to a quarter of them have a pineapple on them. Why? Because they came from the New World. They were incredibly precious and they were delicious. Everybody in Europe wanted a pineapple because they don't grow pineapples in Europe.

• 44:19Speaker 05

  And so different nations have different geographical and intellectual and technological endowments and it's if you improve everybody's standard of living by trading among nations the things that other nations aren't good at.

• 44:34Barry Ritholtz?

  So that seems fair and we all specialize and we all do different things. It makes sense as the US developed computer technology and software that we're not going to make furniture or fabrics and or sneakers or those sorts of things. But at what point does globalization go too far? At what point have we hollowed out the middle class by outsourcing manufacturing to China and other low-cost countries?

• 45:03Speaker 05

  That's a really good question and it was highlighted by a series of patient, again, it was highlighted by a series of papers by an economist named David Autor, A-U-T-O-R, and his colleagues. And it showed just how badly communities that were affected by Chinese competition were hollowed hollowed out. Now, the problem with free trade is that its harms are concentrated and obvious, as David Autor found out, but its benefits are diffuse. So a world in which we have to make our own shirts and our own furniture is a World in which the other 350 million Americans who don't make those things are taxed very heavily.

• 45:47Speaker 05

  So instead of paying $15 for a shirt, you're paying $35 for a shirt. Instead of paying, you know, $2.50 for a head of lettuce, you've got to pay $7 for a head of lettuce. And so that's a world in which everyone else is impoverished, but in which those costs are much harder to see than the out of work auto worker or out of work furniture manufacturer.

• 46:10Barry Ritholtz?

  So, so we certainly have problems in, in the United States. There's wealth inequality, there's income inequality. I think the worst of, of the pandemic inflation is behind us. But we have these real problems with, which a lot of people are blaming on trade and globalization. What's wrong with that thesis?

• 46:36Speaker 05

  The analogy I like to use is Churchill's comment about democracy, which is it's the worst form of government that's ever been tried, except for all the others that have been tried from time to time. I think that's close to the exact quote. And so the, the, the alternative to free trade is protectionism. And protectionism, as we found out during the 30s, is a disaster in multiple dimensions. What happens when you raise tariffs is what we're seeing now is in the first place, prices go up. Steel, you know, automakers, automakers have to make, pay more for their steel.

• 47:15Speaker 05

  You know, people who are making agricultural products and processing food have to pay more for their imported, uh, basic inputs. And so domestic prices go up, you get inflation and we're already starting to see the expectation of inflation going up. I think the median expectation is now 6.7% in survey data. And once you see The expectation of inflation going up, then inflation goes up because that's how inflation is driven. Then you see retaliation, which we're already seeing in spectacular fashion. And you see trade wars, but that is not even the worst cost of protectionism. Because what happens with that is that it inflames international relations.

• 47:59Speaker 05

  And it was apparent to people in 1945 that one of the causes of the Second World War was the protectionism of the 1930s. And that gave rise to the New World Order that we put in place basically in 1945. You know, with the, what came in, what became the World Trade Organization, the IMF, and Bretton Woods. And they said, never, never again, this is never going to happen again. Why did the Japanese attack Pearl Harbor? Well, it's because we embargoed oil. All right? And they knew what would happen if we cut off their oil supplies. And I fear the same thing would happen today.

• 48:44Speaker 05

  Imagine, for example, an inadvertent naval encounter in the Straits of Taiwan between US and Japanese naval vessels. The difference between a peaceful and a non-peaceful outcome may very well be the state of mind of the policymakers on both sides, whose emotions have been inflamed by the trade ruckus.

• 49:05Barry Ritholtz?

  Huh, really interesting. So Pax Americana, 80 years of growth and economic success, much of which accrued to the benefit of the US. Are you implying that that is now at risk?

• 49:23Speaker 05

  Yes, absolutely. There is a man, very fairly well-known economist by the name of Albert Hirschman, who has a fascinating biography. He was Jewish, he was raised in Berlin. Not only was he Jewish, but he was also a socialist. So he fled the Nazi persecution, fought in the French Army against the Germans, then wound up in Marseille, spiriting people. Like Hannah Arendt, out of Marseille into the United States. And he saw quite clearly that World War II was in large part triggered by the trade frictions of that period. For example, you know, one of the things that inflamed the Germans so much was because

• 50:08Speaker 05

  they couldn't pay their way out of the World War I reparations because they couldn't export.

• 50:12Barry Ritholtz?

  Lords of Finance, Le Quat Amat's book goes into great detail about that.

• 50:17Speaker 05

  Yeah, and so he wrote about that in 1945, and he says, "We have to establish a world order in which that doesn't happen again."

• 50:24Barry Ritholtz?

  Huh. So here's the best-case scenario, and I want to talk a little bit about this because Splendid Exchange and Bertha Plany are sort of two sides of the same coin. Best-case scenario, this is just a negotiating tactic. We're going to cut all these side deals and all this brouhaha. Hey, you took them literally, we should have taken them seriously. Is there a way out that doesn't destroy the post-World War II order that has accrued so much wealth to the United States?

• 50:57Speaker 05

  It is possible. I don't think at this point it is probable. I think that so much damage has been done. I don't think that any foreign power is ever going to trust us again. You know, Donald Trump renegotiates NAFTA, we get the USMCA.

• 51:16Barry Ritholtz?

  His new treaty in Trump I.

• 51:20Speaker 05

  In Trump I, and then he repudiates that. And, you know, let's say that a Democrat gets elected into, in 2028, let's assume that, you know, that he not only, he or she not only gets the presidency, but also gets a democratically dominated Congress. The other nations of the world are going to look at us and say, "Yeah, but we don't know who's going to be elected in 2032 or 2036. We can't trust these people ever again."

• 51:46Barry Ritholtz?

  That sounds like a worst-case scenario.

• 51:48Speaker 05

  I think that's the most, I don't think that's the worst-case scenario. I can think of worst-case scenarios than that, which I've just, I described previous to that in terms of geopolitics. But I think that's the most probable scenario. I don't think that anyone is ever going to trust the United States again.

• 52:03Barry Ritholtz?

  So I'm an optimist, because I was fortunate to be born when I was, where I was, into the family I was. I know that shapes how I see the world. I'm kind of hopeful that the 2026 Congress changes hands, the tariff power is retaken back by Congress, which is within their authority to do, and that whoever gets elected in 28, regardless of which side of the aisle, just does a global goodwill tour and kind of rolls back the past four years. Am I being Pollyanna-ish about this? Am I, am I too sanguine about the potential to repair the worst damage that you're suggesting?

• 52:46Speaker 05

  Well, you and I are engaging in, in a forecasting exercise, which is well beyond computational impasse. Human beings, as Philip Tatlock described, don't forecast very well, even, even the best experts. My judgment, my forecast, would be that your scenario is possible, but less probable than, than mine. But I wouldn't be surprised, and I would hope that, that you're right. But if you want a worst-case scenario, which I think is, is probable as yours, the current ructions trashing the, the treasury market, I see rates rising, and I see us falling into a, a debt spiral, and away we go.

• 53:26Barry Ritholtz?

  So Ben Hunt of Epsilon Theory wrote a piece a week or two ago called "The Car Crash of Pax Americana" and lays out that exact case. Nobody wants to buy our treasuries, so how do we finance our debt? The dollar, our exorbitant privilege, the dollar as the world's reserve currency, is replaced with a basket of euro, yen, yuan, things like that. And people just start to realize how good they had it and frittered it away on a very ill-advised policy that the last time we tried it in 1930, Smoot-Hawley, didn't work out well.

• 54:07Barry Ritholtz?

  Either. So if that's the case, why would I want to own a dollar-denominated US assets? Isn't that an argument for head for the hills?

• 54:18Speaker 05

  Why, indeed. And that is certainly an argument for international diversification, to invest in countries whose economies are run by adults.

• 54:27Barry Ritholtz?

  So, once you buy it, the exchange rate no longer matters? If you're purchasing Europe and if you're purchasing Japan, or India, or wherever, and there is inflation in the US and there is a decrease in the value of the dollar, it doesn't matter after you've made the purchase?

• 54:45Speaker 05

  Yeah, there will be damage on a global scale, no matter where you invest, but you will mitigate the damage by investing abroad. That's the argument for international diversification. It hasn't had a lot of fans the past 15 years, but it's coming back into fashion.

• 55:00Barry Ritholtz?

  So, yeah, no, you've definitely seen this year-to-date overseas, especially Europe, and even some of the emerging markets start to do much better than they have. What's fascinating about Splendid Exchange is you trace the rise of trade and the benefits of an interrelated economy back to the plague, the Black Death. Tell us how the plague led to changing up trading patterns.

• 55:29Speaker 05

  Well, it's a fairly well-established economic historical subject, which is that what the plague did is it overvalued labor. A third, a half of the population of Europe disappeared, and so that greatly empowered workers. It drove prosperity. And it also probably, you know, a century, a century and a half later, drove the voyages of discovery to the Indies. What were people looking for in the Indies? Well, they were looking for this really important economic commodity, which was nutmeg, mace, and cloves, which were great luxuries. And it's what made Portugal wealthy early on and then drove the wealth of the Dutch and then finally the English.

• 56:11Barry Ritholtz?

  Huh, that's really interesting. So, one of the things you wrote in Splendid Exchange is, "Trade almost always benefits the nations that engage in it, but only averaged over the entire national economy. There's always a minority that is hurt by evolving trade patterns, and they always call for protection." That was very prescient observation. Is that coming true now, if in what you see, for the people who are demanding protection from international trade and globalization in the current administration?

• 56:46Speaker 05

  Yeah, when trade opens up, then someone is hurt. If you're making furniture in the United States, and people in China can make it more cheaply than you can, then you're going to be hurt as a furniture maker. On the other hand, if you're a consumer of furniture, and there are, you know, thousands and thousand times more consumers of furniture than there are makers of furniture, then you benefit greatly from that. But trade always produces losers and winners. And that was part of the fun of writing Splendid Exchange, was identifying who the losers were, 300 and 400 years ago, and 200 years ago, and 100 years ago.

• 57:27Speaker 05

  400 years ago, the big losers with trade were the people who grew sugar on the island of Madeira, which was a sugar-producing island from about the 15th century, or actually the 14th century on. And they made a lot of money, until people started growing sugar in the Caribbean and in Brazil. And Madeira and sugar producers got clobbered, and they demand and get protection? Yes, they did, because they were losers in the system. And in the 19th century, the big losers, and they drove a protection as you still see today, were European farmers. And it was all the fault of Henry Bessemer, who produces, learns how to produce, or develops

• 58:07Speaker 05

  a process for producing high-quality steel, which goes into steel rails, which enables the grain exporters of the American Midwest, and of Argentina, and of the Ukraine, to export vast quantities of cheap grain, which bankrupted European farmers.

• 58:25Barry Ritholtz?

  Huh.

• 58:26Speaker 05

  Who demanded and got protection. And they have protection even to this day because of that.

• 58:31Barry Ritholtz?

  And then let's talk about the birth of plenty. What is the relationship of trade to all the abundance that we seem to be enjoying, or at least up until recently?

• 58:41Speaker 05

  Well, yeah, it's the same basic thing. It's the ability to purchase things more cheaply than would be available to be available to you from domestic producers. It's that, it's that simple. The birth of plenty was really, really, though, about the four basic preconditions for strong economic growth, which are property rights and capital markets and scientific rationalism and modern transport and communications systems. And so it's not until you see those four things come together that you see the sort of modern economic growth that's really only been present for the past 200 years. It really wasn't until relatively early in the 19th century that this idea that the

• 59:23Speaker 05

  economy grew, per capita GDP grew at 1 or 2% per year, became a reality. Before 1800, per capita GDP growth was zero.

• 59:32Barry Ritholtz?

  Wow, that's amazing. So before we get up to our speed round, let's talk about your next book. What are you, what are you writing now? What are you working on?

• 59:41Speaker 05

  I'm still working on it, and whether or not I get a publisher for it is open to question. I'm interested in two basic subjects. One is the radius of trust and societal radius of trust. That feeds into the strength of institutions, rule of law, property rights. Why did modern prosperity of, or prosperity of the modern sort arise in Northern Europe, in England, and in Scandinavia, and in Germany? Well, it's because those societies have high radiuses of trust. You tend to trust strangers. And the origins of that are just extremely, extremely interesting, having to do with prohibitions on cousin marriage. It's way too complicated to get into.

• 1:00:26Speaker 05

  And then the other subject that I'd love to write about is something that I call the paradox of religion, which is that it is very well established that religiosity is beneficial to the individual. People who are religious live longer. They are healthier psychologically, they have better social connections. They're healthier and happier in every way you'd want to measure. On the other hand, when you look at the national level, religiosity is inversely correlated with the health of a society. So, you know, obviously, the most religious places on earth, Somalia, the Indian subcontinent, you know, Sub-Saharan Africa, are also the poorest nations on earth. The richest nations on earth are the ones that are the least religious.

• 1:01:11Speaker 05

  What I like to talk about is what I call the Somalia-Sweden scale of religiosity. And there's a concept in economics called the paradox of thrift, which we're all familiar with, which is thrift is good for the individual, it's bad for the society. And what you see with religion is that it's the same, the same way. Religion is good for the individual, but religion is bad for the society overall, for obvious reasons. You get religious conflict.

• 1:01:39Barry Ritholtz?

  Well, well, let's break that down. My savings, my thrift, is your lost sales. So that's pretty easy to intuit. Why would my improved psychology and happiness and what have you, as a religious person, end up making the whole country more poor, less wealthy, if everybody's religious?

• 1:02:03Speaker 05

  Because, because it accentuates religious difference, religious and personal differences. If you are deeply religious, you tend to be more distrustful of people of different religions. So, so the societal radius of trust is highest in least religious societies, because there's less reason for personal conflict.

• 1:02:23Barry Ritholtz?

  And tell us about, what is this radius of trust you keep referring to? Give us a little, flesh that out if you would.

• 1:02:32Speaker 05

  Well, the best example I can think of, sort of the most pungent example, is what Jared Diamond talks about in his fieldwork in New Guinea, which is that when two New Guinea Highlanders from different valleys meet, the first thing they do is they try and figure out how they're related, okay? Do you know this person? Do you know that person? This person? Do you know...

• 1:02:54Barry Ritholtz?

  We call that Jewish geography.

• 1:02:56Speaker 05

  Juddar, yes. And so, you figure that out, and the first person who figures out, "Oh, my God, this person on the other side of me doesn't know anything about me," turns around and runs like hell, because he knows if the other person figures that out, he's going to try and kill him. Okay? So, this is a society where people are so mistrustful of people from different tribes, that murder is often the result, all right? Now, in Western societies, you get at it by what's called the trust question, which is, and it's a very, very, very common question in sociological surveys, which is, do you generally believe that other people can be trusted, or do you endorse the statement that you can't be too careful about who you trust? And you can measure societal radius

• 1:03:39Speaker 05

  of trust that way. And a society in which people say, yes, most people can be trusted, and very few people say you can't be too trusting of people, those tend to be much wealthier places, okay? Those are the places where you leave your wallet on the sidewalk by mistake, and it gets returned to you.

• 1:03:56Barry Ritholtz?

  Sure, Japan is notorious for that sort of thing.

• 1:04:00Speaker 05

  Exactly.

• 1:04:00Barry Ritholtz?

  So, let me ask you an odd question. Can both of those things be true at once? Can you, "Hey, we're social primates, this is how we evolved and adapted, and so we want to cooperate, but maybe we need to be a little less gullible about people selling us crappy financial products?" So, are those two things compatible?

• 1:04:23Speaker 05

  Yeah, I mean, there certainly are exceptions. No matter how trusting you are, you know, you have to be very suspicious of the people who calls you from a non-identified phone number.

• 1:04:37Barry Ritholtz?

  Really, really interesting.

• 1:04:38Speaker 05

  Even if you're a trusting Midwesterner from Peoria, you still have to have your guard up.

• 1:04:43Barry Ritholtz?

  So, I only have you for a short period of time, and you've done the favorite questions so many times, I feel like they're redundant. So, rather than go through all of those, I just want to ask you, tell us what you're reading now, what are some of your favorite books, and what's keeping you occupied right here and now?

• 1:05:01Speaker 05

  Well, the person I think who I've read more of in the past year than anyone else is a man by the name of Robin Dunbar, who is an evolutionary psychologist and evolutionary biologist at Oxford. And what he did was he figured out that the size of primate social groups was directly related to the size of, basically the size of their brains, the size of their neocortexes.

• 1:05:29Barry Ritholtz?

  Meaning, the more, the larger your evolutionary brain has developed, the bigger circle of friends you could keep clearing your head. We're talking primates up to and including humans, is that right?

• 1:05:43Speaker 05

  Well, yeah, up to and including humans. Now, Dunbar's number for human beings who have the largest neocortexes, the largest brain sizes, if you will, is about 150. And so, you and I can keep about 150 people straight, and be able to read them, and be able to interact with them, and have a good social and trusting social relationship with them. And that's the natural size of a human being. So, for example, when you look at church congregations, when a church congregation gets to be beyond 150, say, towards 200, towards 200 or 250 people, it splits, because the group can't cohere, it can't keep itself, it can't keep

• 1:06:24Speaker 05

  itself together. What is the basic military unit that you see around the world in all militaries? Well, it's the company. Okay, that's 120, 140 soldiers. That's Dunbar's number. And chimpanzees have a Dunbar's number, because they have smaller brains, so about 50, that's the size of a chimpanzee tribe, or a chimpanzee clan. Lemurs have very small brains. You can't keep more than two lemurs together.

• 1:06:49Barry Ritholtz?

  Really?

• 1:06:50Speaker 05

  Yeah. And so Dunbar has immersed himself of the world of how we keep our social interactions straight, how we juggle them all, and how we're able to do it. And it turns out, for example, that there are some people who have great emotional intelligence, who can, who probably have Dunbar's number of 200 or 250 or 300. That was probably Bill Clinton. You know, Bill Clinton

• 1:07:15Barry Ritholtz?

  Right.

• 1:07:15Speaker 05

  had this ability to read people when, what was said of Bill Clinton, that, you know, when you were talking with him, it wasn't just he was taught, he was talking only to you, you were the only person in the room.

• 1:07:26Barry Ritholtz?

  Right.

• 1:07:27Speaker 05

  And that's a person with a high Dunbar's number, also with a very high, with a very large size default node network, which we talked about

• 1:07:34Barry Ritholtz?

  Uh huh.

• 1:07:34Speaker 05

  earlier, which is the part of your brain that maintains your social intelligence. So Dunbar has a series of books out. One is called Friends, which I can't recommend highly enough. And then the other is called The Evolution of Religion, which has to do with, with religious groups and how religious groups go here and how it has to do with his, with his number. Both absolute, both books are just complete and total brain candy feasts.

• 1:08:04Barry Ritholtz?

  Really? All right. I'm going to put those on my list for sure.

• 1:08:07Speaker 05

  And then, and then, and then, of course, the person who I, you know, the other two people who I read, read repeatedly over and over again are Joe Henrick, who's the head of Theoretical Biology at Harvard. He's the guy who wrote the weird book, you know, W E I R D.

• 1:08:21Barry Ritholtz?

  Oh, sure.

• 1:08:22Speaker 05

  Uh, W I, yeah, W E I R D, Western Educated, Industrialized, Rich and Democratic. And it turns out that most human societies are not weird. Most human societies are traditional societies, and that we in Western societies are the weird ones.

• 1:08:40Barry Ritholtz?

  Huh, fascinating.

• 1:08:41Speaker 05

  And, and he's also the one who's written about how radius of trust evolved, you know, through the prohibitions against cousin marriage. It's the Henrich hypothesis, which is just a fascinating hypothesis. So those are the kinds of people I enjoy reading.

• 1:08:56Barry Ritholtz?

  Huh, really, really interesting.

• 1:08:57Speaker 05

  Oh, and then, and then fiction, Nick Harkaway.

• 1:09:01Barry Ritholtz?

  Don't know the name.

• 1:09:02Speaker 05

  He's the pseudonym of, of Jean-Luc Keré.

• 1:09:07Barry Ritholtz?

  Oh, okay.

• 1:09:08Speaker 05

  Jean-Luc Keré, who of course is also a pseudonym. And he's taken up the Smiley series and he, it's hard to admit, you don't want to read it because who wants to read a book by the son of a great novelist? He's better than his father.

• 1:09:21Barry Ritholtz?

  No kidding?

• 1:09:22Speaker 05

  Yeah.

• 1:09:23Barry Ritholtz?

  Wow, that's amazing.

• 1:09:24Speaker 05

  He wrote a book called Carla's Choice, which is, you won't be able to put down.

• 1:09:28Barry Ritholtz?

  Carla's Choice?

• 1:09:29Speaker 05

  Yeah, K, if you're, if you're a Smiley fan, you know who Carl is. K A R L A.

• 1:09:32Barry Ritholtz?

  All right.

• 1:09:33Speaker 05

  A Russian, a Russian spy.

• 1:09:35Barry Ritholtz?

  Huh, sounds like fun. Bill, thank you for being so generous with your time. We have been speaking to Bill Bernstein, author of so many fascinating books, The Intelligent Investor, Four Pillars of Investor, on and on. His most recent book is on the delusions of crowds. If you enjoy this conversation, well, be sure and check out any of the previous 500 or so we've done over the past 10 years. You can find those at Bloomberg, iTunes, Spotify, YouTube. Be sure and check out my new book, How Not to Invest: The Ideas, Numbers, and Behaviors That Destroy Wealth and How to Avoid Them. I would be remiss if I did not thank the crack team that puts these conversations together each week. John Wasserman is my audio engineer.

• 1:10:20Barry Ritholtz?

  Anna Luke is my producer. Sean Russo is my head of research. I'm Barry Ritholtz. You're listening to Masters in Business on Bloomberg Radio.

• 1:10:41Speaker 06

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