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. 

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Episode Transcript

Speaker 1 (00:02):
Bloomberg Audio Studios, podcasts, radio news. This is Masters in
Business with Barry Ritholts on Bloomberg Radio.

Speaker 2 (00:16):
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

(00:41):
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, I want to
get into some of the details before we start talking

(01:01):
about markets and investing. You practice neurology for twenty years.
That's kind of unusual to say I've had enough of that.
Let me start managing assets. Tell us about that transition.

Speaker 3 (01:15):
Well, first of all, it kept me off the streets,
and secondly, I'm easily bored, so I do move from
thing to thing. And it occurred to me all about
forty 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

(01:38):
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. And I just

(02:00):
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?

Speaker 1 (02:13):
Uh?

Speaker 2 (02:14):
Just LTCM? Yeah, exactly, need to spell it.

Speaker 3 (02:17):
Yeah, I mean, if 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.

Speaker 2 (02:33):
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.

Speaker 3 (02:55):
Yeah, 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 both of them. If you can't master both,

(03:17):
you're dead in the water.

Speaker 2 (03:19):
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.

Speaker 3 (03:36):
Well, it gets to what I call the prom queen
theory of life, which is the different.

Speaker 2 (03:41):
Wait, the prom queen theory of life.

Speaker 3 (03:44):
Indeed, if you're the prom queen, then the most important
thing in the world is how you dress and how
you look, and that's how you judge other people. Brains,
athletic ability, political ability don't matter.

Speaker 1 (03:57):
Well.

Speaker 3 (03:57):
Financiers are exactly the same way. If 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, getting 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

(04:20):
of their emotions and their psychology, and that's what gets
them into trouble. They don't understand the history and now
how that feeds into mass fear and mass greed and
mass illusions, which is why I wrote that particular book.

Speaker 2 (04:33):
Kind of reminds me of the Richard Feinemann quote imagine
how much harder physics would be if electrons had feelings?

Speaker 3 (04:40):
Exactly?

Speaker 2 (04:40):
Yeah, 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?

Speaker 3 (04:54):
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 the was
a Scottish guy who lived almost two hundred years ago.
Charles Mackay who wrote Extraordinary Popular Delusions and The Madness
of Crowds are actually memoirs of Extraordinary popular Delusions and
the Madness of crowds, and he described all of the

(05:16):
things that we've been seeing, you know, over the past
couple of decades, more than two hundred years ago.

Speaker 2 (05:23):
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?

Speaker 3 (05:38):
Well, he's also a historian. You know, he's written several
historically deep books, particularly about Bernard Baruk, 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 nineteen twenty nine crash was non non prole.

(06:01):
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, you know, with every paragraph.

Speaker 2 (06:09):
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.

Speaker 3 (06:21):
Yeah, especially you know, whenever anybody talks about innovation in finance,
he describes it as reinventing the wheel, only in slightly
more unstable form.

Speaker 2 (06:31):
That's pretty 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?

Speaker 3 (06:53):
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 in
time the market. If you don't know that, you're in

(07:14):
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 as abulian and frothy, and you can
say I know what's going to happen, I just can't

(07:37):
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 is twenty years old or twenty five 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.

Speaker 2 (07:58):
That's right, that's right. I have been told that markets
can stay irrational longer than you can stay solvent.

Speaker 3 (08:06):
Yeah, that's an apocryphal quote from right from Canes yet.

Speaker 2 (08:09):
Right, but not really. I don't believe he ever said that. No,
he certainly never wrote it.

Speaker 3 (08:14):
No, he never said it or wrote it.

Speaker 2 (08:16):
So, speaking of apocryphal times, you have said investors should
build their portfolios for the worst two percent of market
conditions rather than normal times. Tell us why you believe that,
and how do we go about accomplishing that?

Speaker 3 (08:33):
Well, that's 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 two percent of times. So you design

(08:54):
your portfolio for the worst two percent of times, which
means that it should be more conservative then you think
it should be the other ninety eight percent of the time.
And it's a suboptimal allocation to have less stocks. A
suboptimal But what I like to say, is it a
suboptimal allocation you can execute is better than an optimal
one you can't execute.

Speaker 2 (09:15):
No doubt about that. You mentioned someone twenty twenty five.
There are a number of people who have said, and
I've been swayed in this direction. Hey, when you're twenty
twenty five years old and you don't need this money
for thirty forty fifty years, do you really need bonds
to offset the volatility of equities. Shouldn't you be one
hundred percent equities at that age?

Speaker 3 (09:38):
Theoretically yes, Practically no, because there are a few sentient
beings in this quadrant of the galaxy that can tolerate
one hundred percent stocks.

Speaker 2 (09:48):
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 CRISP and other widely available databases. Tell us

(10:10):
how you want about doing this?

Speaker 3 (10:11):
Oh no, no, I stole it from them.

Speaker 2 (10:13):
Oh you did?

Speaker 3 (10:14):
Yeah? I mean I went out and spent full disclosure.
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 ninety five dollars which seemed
like a king's ransom at the time, for the Ibbitson yearbook.
And I transcribed all you know, nine hundred and eighty
five data points into a spreadsheet which I had just

(10:35):
learned how to use, you know, sometime around nineteen ninety.
And then 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 sits from
them as as well.

Speaker 2 (10:55):
By the way, I find Ken Fisher to be one
of the more fascinating people in finance, because not only
did he bring a writer's perspective. I think he was
the longest running Forbes columnist at like forty three years,
some crazy number, writing a monthly column for them. But

(11:18):
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 ab testing, iterating on a
continual basis, long before Google started doing that online. He

(11:42):
was one of the early people who developed here's what
financial asset management marketing should look like.

Speaker 3 (11:51):
Yeah, and he did all those things, and he's also
a superb writer and observer. I think you interviewed him
a couple of times, Yeah, once or twice, maybe once
memorably and well there was that sure, And you know,
he said something on one of your interviews that that
stuck with me, you know, for the past twenty years,
which is that he pays close attention to the headlines

(12:14):
because he knows that if something is above the fold,
it's already been impounded into prices and can be safely ignored.

Speaker 2 (12:20):
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 it was

(12:41):
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 as the new firm going pretty good, we're a
few hundred million dollars, blah blah blah. You know, we

(13:02):
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

(13:24):
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

(13:46):
is fascinating 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.

Speaker 3 (14:09):
I mean, if we can get into just a little
bit of neurophysiology here, there's something called the well.

Speaker 2 (14:13):
You happen to be a neurologist, so let's have at it.

Speaker 3 (14:16):
There's something called the default mode network, which is a
part of your brain that becomes electrically active when you're
at rest and which turns itself off when you're doing
any focused task. And it turns out you can locate
it anatomically on imaging studies, and people who have well
developed anatomically well developed default mode networks tend to be

(14:40):
very good at reading other people 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.

Speaker 2 (14:51):
People, and so he kind of blunt by the way,
the firm is 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 forty five years. He's been at least writing in
public for all that time. You know, sometimes stuff happens,

(15:15):
and in a sort of social media gotcha environment.

Speaker 3 (15:20):
To say nothing of being a spectacularly effective environmentalist.

Speaker 2 (15:26):
So on our last interview with him, we talked about
all 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.

(15:46):
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
think he meant it in any other way, and it,
you know, they kind of had to reel him in
a bit. But the farm is doing fine. His farm

(16:07):
is doing fine. And there was like about a five
billion dollar outflow. But when you're one hundred and five
or one hundred and ten 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.

Speaker 3 (16:22):
Yeah, and he has the address here on Lexington, so
he knows where to send the chocolates.

Speaker 2 (16:28):
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.

(16:52):
Is it an exaggeration or is it accurate?

Speaker 3 (16:55):
No, it's 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,

(17:16):
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 at me straight in
the eye and she said no, she was afraid of stocks.
Really yeah, And so that's the difference. If you can
suppress that fear, you will do very well, and if

(17:37):
you can't suppress the fear, then you probably will die poor.

Speaker 2 (17:42):
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

(18:05):
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, 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

(18:25):
when you look at history, and you look at a
chart of everything that's happened, go back one hundred years,
go back to nineteen twenty six. There's always a reason
to sell stocks year in, year out. There's always some
spectacularly crazy news that says this is gonna be terrible.
I want to sell. And if you're selling in response

(18:46):
to headlines, you know, and you're gonna wait for the
dust to clear by that it's too late. You've missed
most of the recovery. How do we deal with that
never ending threat that persists? This time is different since
and carent affairs the headlines today? Does it feel like
the tariffs are different? Or is this no different than

(19:10):
the Great Financial Crisis, the pandemic, the dot com implosion,
go down the list to say nothing of the Kennedy
assassination nine to eleven, Like there are endless reasons to
be panicked about what's going on in the world.

Speaker 3 (19:24):
Yes, this time certainly was different. Never before in American
history has a colossally incompetent American president tried to creator
the economy. And that's it's very different.

Speaker 2 (19:35):
Do you think that was his purpose? Is he like, hey,
we cause the recession rates come down and that's good
for real estate?

Speaker 3 (19:40):
Or I think 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 Howard looked at him and said, quick,
multiply six times seventeen. All right. None of the three

(20:00):
of them could do itred two. Well, that's the whole point.
And you know, Don Junior laughed, he thought it was funny.
Ivankas said, oh no, you don't have to be able
to do math.

Speaker 2 (20:11):
To do real estate or investing for that math.

Speaker 3 (20:15):
But the most interesting response was Donald's. He said, no,
it's one hundred and twelve, and he argued with Howard
Stern about whether it was one hundred and two or
one hundred and twelve.

Speaker 2 (20:24):
Six times ten is sixty six times seven is forty two,
sixteen forty two. I mean that's how I do math
in my head. I don't know how you do it.

Speaker 3 (20:31):
Yeah, yeah, there's yeah, that's one way to do it.
Or you might know that three times seventeen is fifty one, okay,
and you could double it, double it exactly. 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,

(20:53):
how different was that from nine to eleven? All right,
nine to eleven was sure different.

Speaker 2 (20:58):
I mean, arguably, Jeorge H. W. Bush is in 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.

Speaker 3 (21:16):
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.

Speaker 2 (21:28):
And yet the market continued to go higher during the
first Trump presidency regardless of who was president.

Speaker 3 (21:33):
Because they took him literally but not seriously.

Speaker 2 (21:37):
Other way around, Yeah, seriously but not literally. Yeah, this
time I think we should be taking him literally but
not seriously.

Speaker 3 (21:44):
Yeah. Yeah, that's right, got it reversed exactly.

Speaker 2 (21:47):
Yeah, the great So we talked earlier about the efficient
market hypothesis. So to be fair to the president, he's
been talking about Tariff's 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

(22:07):
Liberation Day when here's a guy who has 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 second if the market's so efficient.

Speaker 3 (22:26):
Well, I think that the reason why is because he
didn't do ninety percent 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.

Speaker 2 (22:46):
And I think that his breaking and the price of eggs, yeah.

Speaker 3 (22:48):
Exactly, And I think that his I think that his
promise on tariff's just got put in the bin with
the rest of the stuff. He obviously wasn't going to
do it and didn't do.

Speaker 2 (22:59):
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

(23:22):
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?

Speaker 1 (23:39):
No?

Speaker 3 (23:39):
I think that it's this time is different in the
same way that all the other times were were different.
I mean, you know October nineteenth, you know nineteen eighty seven, 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 twentieth of nineteen eighty seven was to
buy stocks.

Speaker 1 (23:58):
Right.

Speaker 2 (23:59):
So when you say so, not that you had time
like I was hoping, we would be down. I don't
get excited about down eight to ten percent, but down
twenty percent, you've got my attention. I want to start
legging into more equities. We never quite got there on
the SMP, right, I think, well we down eighteen percent,
seventeen percent.

Speaker 3 (24:18):
Yeah, And it's the same thing with you know late
March of twenty twenty, Boy, that was fast.

Speaker 2 (24:22):
Thirty four percent seventeen days. So if you were looking
for down twenty You got it. You just only had
a day or two to react.

Speaker 3 (24:30):
Yeah, I don't, you know. I try to stay away
from correction ten percent bear market twenty percent. To me,
that's numerology.

Speaker 2 (24:37):
There's no difference one hundred you and I know, you know,
I find the base ten like what you have ten
fingers and ten toes. So twenty percent is a bear market.
There's just no data that supports that.

Speaker 3 (24:48):
No, there's no difference between the market being down nineteen
percent and down being down twenty one percent. It behaves
the same way in both cases.

Speaker 2 (24:56):
Arguably. If so, maybe I should make our rebalance BA
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.

Speaker 3 (25:07):
Yeah, until you get to you know, March of nine,
and there you've rebalanced. You've thrown all your cash in
three different times.

Speaker 2 (25:17):
And but you know, if you've thrown away your cash,
it kind of works out. The really the really strange
thing about bear markets, and I'm my frame of reference
is not just twenty to twenty thirteen, but the Dow
kisses one thousand in nineteen sixty six and it doesn't
get over and on a permanent basis till nineteen eighty two.

(25:38):
And if you just continued to dollar cost average for
those sixteen years, or from twenty to twenty thirteen, when
the market finally got over all its previous highs, that's
when you start to make a ton of money because
that next cyclical I'm sorry, that next secular move. Those

(26:00):
bad buys you've made over the past ten years, suddenly
they start flower.

Speaker 3 (26:05):
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

(26:25):
are a periodic savory, you're a young person who's putting
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 than stocks are three mile Island dangerous? You are?

Speaker 2 (26:45):
You know, you have to explain what that means to a.

Speaker 3 (26:48):
Young 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 parody of all Yeah, yeah,
the China syndrome. That's right, uh and and and so
the point being that if you're an older person, stocks

(27:08):
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, uh, 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.

Speaker 2 (27:27):
I guess five out of six times. But that said
that that six time is a doozy, isn't it exactly?

Speaker 3 (27:33):
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.

Speaker 1 (27:43):
Uh.

Speaker 3 (27:44):
But on the other hand, if you invest too heavily
in stocks and you're wrong, then you're bunking with your kids.

Speaker 2 (27:50):
Right, if you're an older investor and you don't have
that time horizon, right. Yeah, someone someone said to me,
can you really look through the next four years if
you're not retiring for ten or twenty years, or if
your kids five twenty nine, they're not going to school
for ten fifteen years. That's the easy question. The challenge
is what happens if you're retiring in twenty five, twenty six,

(28:13):
twenty seven, right in the next three years. You know,
that sequence of returns problem is really thorny. 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 four percent as
an average, but how much do you draw down each
year if your first couple of years of retirement is

(28:35):
down five, down, ten, down, twenty percent?

Speaker 3 (28:38):
Yeah, there's this one or wonderful little bit of quantitative
work done by Mike Kitsis. And wait, foul about you
know the reversel 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 your first five
ten years of retirement, you want to be fairly conservative

(28:58):
just for that reason. And then when you're eight years
old and you know you'll be pushing up the daisies
in five or ten years, then you can be more
aggressive because you don't need that much of a liability
match in portfolio at that age.

Speaker 2 (29:11):
Huh 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?

Speaker 3 (29:22):
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 short term volatility,
and short term volatility is not of any real importance
to the long term investor. The real risk of long

(29:45):
term investing is not having enough assets to pay for
your living expenses five, ten, fifteen, twenty thirty years from now.
So what are the things? What are the what are
the events that can that can impair that? Big ones? Inflation? Inflation?
Hyper inflation in particularly is extremely common. It is almost

(30:05):
the rule rather than the exception. Really, sure, you look,
all you have to do is ask yourself, what unit
of currency that would buy yourself something in the year
nineteen hundred can still buy yourself something today? Well, the
US dollar 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

(30:27):
buy you a candy bar if you find the right
store in Geneva or more likely burn and so you
know those, you know, they're the case of the yen
and the French franc and the German lera are much
more common than the US dollar and the Swiss frank
and the English pound.

Speaker 2 (30:46):
Those German deutsch Mark, Italian lera.

Speaker 3 (30:49):
Exactly exactly, Yeah, I mean you start with, you know,
a reich mark in the year nineteen twenty and you
know by nineteen twenty three, late nineteen twenty three, you
were down to one trillionth of its personal purchasing power.
That's hyper inflation. 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,

(31:11):
there are other three other things that can well.

Speaker 2 (31:14):
Wait before you go to the other three things. How
do you defend against that.

Speaker 3 (31:18):
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.

Speaker 2 (31:35):
We went through that with Michael Boskin already rejiggered how
we calculate, right, of course, the 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

(31:55):
just means I've been priced out of steak. Not that
this is.

Speaker 3 (31:58):
The equivalent, Yeah, exactly, I mean it is. It is
a problem. But of all of the asset classes that
protect you with the greatest charity against the decrement in
your future consumption, loss of your future consumption, tips do
it better than anything else I can think of. All.

Speaker 2 (32:15):
Right, stock, really interesting stocks.

Speaker 3 (32:18):
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 when real assets. You know, companies own real estate,
they own equipment, they have human capital, and those retain
real value.

Speaker 2 (32:36):
Plus stocks are their revenue and profits are in dollars,
so at least in the US, so if there's inflation,
the cost of their goods go up and their total dollars,
maybe their profits get squeezed, but everything seems to rise
in an inflationary environment on the equity side, right.

Speaker 3 (32:55):
Right, And then there's certain kinds of stocks that are
especially good at protecting you inst 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 perform the market

(33:20):
by an inflation by a very good margin. And then finally,
there are commodities producers in an inflation 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 the bond side, for God's sakes,

(33:42):
keep your maturity short. As we found out in twenty.

Speaker 2 (33:45):
Two, 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?

Speaker 3 (33:54):
It's pretty good. But what I like to say about
real estate is that it's not an investment. It's a job.

Speaker 2 (34:00):
Yeah.

Speaker 3 (34:00):
If you, if you, if you, if you enjoy dealing
with drug addle tenants and fixing toilets, then be my guest.

Speaker 2 (34:08):
Okay, I wasn't. I wasn't thinking of rental properties. I
was thinking of the various roots and offices and paying
a professional to manage it. So you're not getting the
two am call that the toilet is overflow.

Speaker 3 (34:21):
Yeah, but then by the time you're investing in public reads,
you're back in the stock market again.

Speaker 2 (34:25):
Right, So there's no difference. Really really really really interesting.
I was kind of fascinated by a data point you
shared talking about old Master paintings. Imagine if you bought
a Rembrandt for one hundred bucks, and three hundred and
fifty years later you sold it for ten million dollars

(34:45):
the return was a little over three percent a year.
That that's astonishing. All these paintings look like they've appreciated
so much. Tell us about the math behind these paintings
that go for ten twenty thirty million dollars.

Speaker 3 (35:01):
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 the they knew back in the in
the Far East, that you know, the emperor asks the
artisan or the farmer what he wants. We'll put one

(35:22):
grain of rice on the first square in the of
the chessboard. And by the time you get, of course
to the to the square, but by the time you
get to the sixty fourth 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,

(35:47):
but it also has a complementary value, which is a
syesthetic return. And Bill Bommel did the research on this,
the late Bill Bommel. Then Yu did the research on
this and figured out out that art had a much
lower return than stocks or bonds simply because of its
esthetic return.

Speaker 2 (36:08):
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 returns.

Speaker 3 (36:24):
So to say nothing of the maintenance and insurance and
security costs of keeping the art as well.

Speaker 2 (36:30):
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

(36:52):
we're in. What is the history of trade and how
has it helped raise everybody standard of living?

Speaker 3 (37:01):
Well, it just gets down to Adam Smith's concept of specialization.
Nations specialize, and nations have and people have an intrinsic
tendency too, 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 seventeenth

(37:22):
century was the pineapple. If you look at the coats
of arms of all these European aristocrats, about third or
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. And so

(37:44):
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.

Speaker 2 (38:00):
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 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

(38:23):
outsourcing manufacturing to China and other low cost countries.

Speaker 3 (38:28):
That's a really good question, and it was highlighted by
a series of patients. Again, it was highlighted by a
series of papers by an economist named David Otter auto
R And his colleagues, and it showed just how badly
communities that were affected by Chinese competition were hollowed hollowed out. Now,

(38:49):
the problem with free trade is that its harms are
concentrated and obvious, as David Order 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 three hundred and fifty
million Americans who don't make those things are taxed very heavily.

(39:11):
So instead of paying fifteen dollars for a shirt, you're
paying thirty five dollars for a shirt. Instead of paying,
you know, two and a half dollars for a head
of lettuce, you've got to pay seven dollars for ahead
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.

Speaker 2 (39:34):
So we certainly have problems in the United States. There's
wealth inequality, there's income inequality. I think the worst of
the pandemic inflation is behind us, but we have these
real problems with which a lot of people are blaming

(39:54):
on trade and globalization. What's wrong with that thesis.

Speaker 3 (40:00):
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 route. And so the alternative to free trade
is protectionism, and protectionism, as we found out during the thirties,

(40:23):
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. You know, automakers, automakers have
to pay more for their steel. You know, people who
are making agricultural products and processing food have to pay

(40:43):
more for their imported 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
media and expectation is now six point seven percent in
survey data. And once you see the expectation of inflation
going up, then inflation goes up, because that's how inflation

(41:05):
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 costs cost of protectionism, because
what happens with that is that it inflames international relations.
And it was apparent to people in nineteen forty five

(41:29):
that one of the causes of the Second World War
was the protectionism of the nineteen thirties, and that gave
rise to the new world order that we put in place.
Basically in nineteen forty five, you know, with the what
came in what became the World Trade Organization, the IMF

(41:49):
and Breton Woods, and they said, never, never again, this
is never going to happen again. Why did the Japanese
attack Pearl Harbor r It was 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. Imagine, for example, an inverted naval

(42:11):
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.

Speaker 2 (42:29):
Huh really interesting. So PAX Americana eighty 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?

Speaker 3 (42:47):
Yes. Absolutely. There is a man, very fairly well known
economists by the name of Albert Hirshman, 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

(43:10):
people like Hannah Arendt out of Marseille into the United
into the United States. And he saw quite clearly that
World War II was enlarged part triggered by the trade
frictions of that period. For example, you know, one of

(43:30):
the things that inflamed the Germans so much was because
they couldn't pay their way out of the World War
One reparations, because they couldn't export.

Speaker 2 (43:37):
And Lord quad Amat's book goes into great detail about that.

Speaker 3 (43:41):
Yeah, and so he wrote about that in nineteen forty five,
and he says, we have to establish a world order
in which that doesn't happen again.

Speaker 2 (43:49):
Huh. So here's the best case scenario. And I want
to talk a little bit about this because splendid Exchange
and Birth of plenty 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 brew Haha, Hey, you took him literally,

(44:09):
we should have taken him seriously. Is there a way
out that doesn't destroy the post World War two order
that has accrued so much wealth to the United States?

Speaker 3 (44:21):
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 any foreign power is ever
going to trust us again. You know, Donald Trump renegotiates
andn after we get the USMCA.

Speaker 2 (44:41):
His new treaty in Trump one, in Trump one.

Speaker 3 (44:45):
And then he repudiates that. And you know, let's say
that the Democrat gets elected into in twenty twenty eight.
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 twenty

(45:06):
thirty two or twenty thirty six. We can't trust these
people ever.

Speaker 2 (45:09):
Again, that sounds like a worst case scenario.

Speaker 3 (45:12):
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 front 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.

Speaker 2 (45:27):
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 twenty twenty six Congress
changes hands, the tariff power is retaken back by Congress,
which is within their authority to do, and that whoever

(45:50):
gets elected in twenty eight, 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
pollyannish about this? Am I too sanguine about the potential
to repair the worst damage that you're suggesting?

Speaker 3 (46:11):
Well, you and I are engaging in a forecasting exercise.
Which is well beyond computational impass 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 mine. But I wouldn't be surprised,
and I would hope that you're right. But if you

(46:34):
want a worst case scenario, which I think is as
probable as yours, the current ructions trashing the treasury market,
I see rates rising, and I see us falling into
a debt spiral, and away we go.

Speaker 2 (46:50):
So Ben Hunt of Epsilon Theory wrote a piece a
week or two ago called the car Crash of Pak's
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, wan,

(47:14):
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 nineteen thirty, Smooth Hawley didn't work out well. Either.
So if that's the case, why would I want to

(47:36):
own a dollar denominated US assets? Isn't that an argument
for head for the hills?

Speaker 3 (47:42):
Why? Indeed, and that is certainly an argument for international diversification.
To invest in countries whose economies are run by adults.

Speaker 2 (47:51):
So once you buy it, the exchange rate no longer matters.
If you're purchasing Europe, and if you're purchasing Japan or
in 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.

Speaker 3 (48:09):
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 fifteen years,
but it's coming back into fashion.

Speaker 2 (48:24):
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,

(48:47):
the Black Death tell us how the plague led to
changing up trading patterns.

Speaker 3 (48:54):
Well, it's a fairly well established economic historical subject, which
is that what the plague did is it overvalued labor.
A third 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

(49:14):
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 clothes, 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.

Speaker 2 (49:36):
Huh, that's really interesting. So one of the things you
wrote in Exploded 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.

(49:57):
That was very pressing in observation. Is that coming true
now in what you see for the people who are
demanding protection from international trade and globalization in the current administration.

Speaker 3 (50:10):
Yeah, when 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 then you can,
then you're going to be hurt as a furniture maker.
On the other hand, if you're a consumer of furniture

(50:30):
and there are you know, thousands and thousand times more
consumers of furniture than there are makers furniture, then you
benefit greatly from that. But trade always produces losers and winners.
Now is part of the fun of writing Splendid Exchange
was identifying who the losers were three and four hundred
years ago, and two hundred years ago, and one hundred

(50:51):
years ago, four hundred years ago, the big losers with
trade were the people who grew sugar on the island
of Madeira, which was a sugar producing eye and from
about the fifteenth century or actually the fourteenth century on,
and they made a lot of money until people started
growing sugar in the Caribbean and in Brazil and Madeir
and sugar producers got clobbered. And did they demand and

(51:15):
get protection, Yes, they did because they were losers in
the system. And in the nineteenth century the big losers,
and they drove a protection as you still see today,
were European farmers, and was all the fault of Henry Bessemer,
who learns how to produce or develops a process for
producing high quality steel which goes into steel rails, which

(51:37):
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 who demanded and got protection,
and they have protection even to this day because of that.

Speaker 2 (51:55):
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.

Speaker 3 (52:06):
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 simple.
The birth of plenty was really, really though about the
four basic preconditions for strong economic growth, which are property

(52:27):
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 two hundred years. It really wasn't until relatively
early in the nineteenth century that this idea that the

(52:48):
economy grew per capita GDP grew at one or two
percent per year became a reality. Before eighteen hundred, per
capita GDP growth was zero.

Speaker 2 (52:57):
Wow, that's amazing. So before we get to our speed round,
let's talk about your next book. What are you writing now?
What are you working on?

Speaker 3 (53:06):
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 institution's rule of law property rights. Why did

(53:27):
modern prosperity or prosperity of the modern sort arise in
Northern Europe and England, and in Scandinavia and in Germany
Weltz 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. And

(53:50):
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.

(54:13):
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. What I

(54:36):
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 way. Religion is good for the individual,

(54:57):
but religion is bad for the society overall for obvious reasons.
You get religious conflict.

Speaker 2 (55:04):
Well, well, let's break that down my savings, my thrift
is your laws sales, So that's pretty easy to into it.
Why would my improved psychology and happiness and whatever you,
as a religious person, end up making the whole country

(55:24):
more poor less wealthy if everybody's.

Speaker 3 (55:26):
Religious, 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 the societal radius
of trust is highest in the least religious societies because
there's less reason for personal conflict.

Speaker 2 (55:48):
And tell us about what is this radius of trust
you keep referring to give us a little flesh that
out if you would.

Speaker 3 (55:56):
Well, the best example I can think of, sort of
the most pungent example is what Jared Diamond talks about
in his field work 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 you

(56:17):
that person, this person your call that Jewish geography judar. Yes,
and so you figure that out, and the first person
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 where people are so

(56:39):
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 be too careful about who you trust? And you

(57:02):
can measure societal radius 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.

Speaker 2 (57:21):
Sure, Japan is notorious for that sort of thing exactly.
So let me ask you an odd question. Can both
of those things be true at once?

Speaker 1 (57:32):
Can you?

Speaker 2 (57:33):
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. Are those two things compatible?

Speaker 3 (57:48):
Yeah, I mean there certainly are exceptions. No matter how
trusting you are, you have to be very suspicious of
the people who calls you from a non identified phone number.

Speaker 2 (58:01):
Really interesting, even if you're.

Speaker 3 (58:03):
A trusting Midwesterner from Peoria, you still have to have
your guard up.

Speaker 2 (58:08):
So I only have you for a short period of time,
and you've done the favorite question 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?

Speaker 3 (58:26):
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 Gunbar who is an evolutionary
psychologist and an evolutionary biologist at Oxford. And what he
did was he figured out that the size of primate

(58:47):
social groups was directly related to the size that basically,
the size of their brains the size of their neocortexes.

Speaker 2 (58:54):
Meaning the more the larger your evolutionary brain has developed
the biggest circle of friends you could keep clear in
your head. We're talking primates up to and including humans.

Speaker 3 (59:07):
Is that right, Well, yeah, up to and including humans.

Speaker 2 (59:09):
Now.

Speaker 3 (59:09):
Dunbar's number for human beings who have the largest neocortex
is the largest brain sizes, if you will, it is
about one hundred and fifty all right, And so you
and I can keep about one hundred and fifty 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

(59:33):
of a human band. So for example, when you look
at church congregations, when a church congregation gets to be
beyond one hundred and fifty, say towards two hundred, towards
two hundred or two hundred and fifty people, it splits
because the group can't cohere, it can't keep itself, it
can't keep itself together. What is the basic military unit
that you see around the world in all militaries, Well,

(59:54):
it's the company. Okay, that's one hundred and twenty, one
hundred and forty soldiers. That's dune Bars number. And chimpanzees
have a Dunbar's number because they have smaller brains of
about fifty that's the size of a chimpanzee tribe or
a chimpanzee clan. Lemmurs have very small brains. You can't
keep more than two lemurs together. Really, Yeah, And so

(01:00:18):
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
two hundred or two hundred and fifty or three hundred.
That was probably Bill Clinton. You know, Bill Clinton had

(01:00:40):
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, right,
And that's a person with a high Dunbar's number, also
with a very high with a very large size to
full mode network, which we talked about earlier, which is

(01:01:00):
the part of your bane 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

(01:01:22):
with his number. Both absolutely, both books are just complete
and total brain candy feasts.

Speaker 2 (01:01:28):
Really all right, I'm going to put those on my
list for sure.

Speaker 3 (01:01:31):
And and then and then of course the person who
I you know that the other two people who I
read read repeatedly, over and over again are Joe Henrik,
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. Oh sure, w I W E I
R D. Western educated, industrialized, rich and democratic, And it

(01:01:56):
turns out that most human societies are not weird, most
human societies, you're true additional societies, and that we in
Western societies are the weird ones.

Speaker 2 (01:02:04):
Huh.

Speaker 3 (01:02:05):
And and he's also the one who's written about how
radius of trust evolved, uh, you know, through the prohibitions
against cousin marriage. It's the Hendrick hypothesis, which is just
a fascinating hypothesis. So those are the kinds of people
I enjoy reading.

Speaker 2 (01:02:20):
Hut.

Speaker 3 (01:02:21):
And then and then fiction Nick Harkaway, Uh, I don't
know the name. He's the pseudonym of of Jean Le Carrey.
Jehan La Carey, of course is also a pseudonym.

Speaker 2 (01:02:35):
Uh.

Speaker 3 (01:02:35):
And he's taken up the Smiley series and he it's
hard to make 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.

Speaker 2 (01:02:45):
Father, no kidding? Yeah, wow, that wrote book.

Speaker 3 (01:02:48):
Carlo's choice, which is you won't be able to.

Speaker 2 (01:02:51):
Put down Carlos joints.

Speaker 3 (01:02:53):
Kay. If you know, if you're a Smiley fan, you
know who carl is k A r l A all right,
Russian spy.

Speaker 2 (01:02:59):
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.

Speaker 1 (01:03:11):
On and on.

Speaker 2 (01:03:12):
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 five hundred or so we've
done over the past ten years. You can find those
that Bloomberg, iTunes, Spotify, YouTube. Be sure and check out
my new book, How Not to Invest The ideas, numbers,

(01:03:33):
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. Anna Luke is my producer.
Sean Russo is my head of research. I'm Barry Richolts.
You're listening to Masters in Business on Bloomberg Radio.