At the Money: Doctor's Orders - How to Change Careers

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1:08How often have you thought about making major change in your career. You're going to give up some time, some effort, a lot of education, and potentially a lot of money. But if it pays off in the end, then it's a worthwhile thing to be true to yourself. On today's At The Money, let's speak with William Bernstein. He began his career as a medical doctor, a neurologist who discovered he had a knack for investing and investment research, eventually opening efficient frontier advisors. He is also the author of multiple books, The Intelligent Asset Allocator, Four Pillars of Investing, Investor's Manifesto, and on and on.

1:52His most recent book is The Delusions of Crowd. Bill Bernstein, welcome to At The Money. Let's just start with a quick question. you went to medical school did you expect to spend your whole life as a doctor heaven no uh i uh at least i i didn't expect that that was going to happen uh but uh you know i happen to live in a country that doesn't have a functioning social welfare system or safety net and so i realized i was going to have to uh invest and save for my own retirement and i went about it in the way that I thought any scientist would do, which is to read the peer-reviewed literature, basic textbooks, collect data, build models.

2:38And that led me into finance and eventually led me into writing about history because you really can't do finance unless you have a good working knowledge of the history. And I found that I enjoyed reading and writing about it. So this began as you thinking, I need to plan for my own finances. What was the aha moment that, hey, I now have a new knowledge base and a new skill set. Maybe I could share this with other people. I'll give credit to a guy you may have heard of named Frank Armstrong, who was one of the early efficient market passive indexing gurus. He was another financial advisor. and after I had built some of my models, he said, you know, Bill, you need to put all this stuff online.

3:28You've got a basic textbook that you wrote. You need to put that online as well, which he had already done. You know, this is, we're talking more than 30 years ago. And you do that and pretty soon you find that you're getting called by journalists, you're getting called by other investors and one thing leads to another and the next thing you know, you're managing money and writing books. So what was the moment when this went from, I need to take control of my own finances to, hey, maybe I don't want to be a neurologist anymore. Maybe my career lay in managing money for other people. Well, there are two kinds of doctors.

4:09The overwhelming majority of doctors, probably you know 60 70 percent of them realized by age 50 or so that it's a tough game and they're going to get very tough and it's gotten worse hasn't it it has not gotten any easier that's for sure and they're going to get out of it as soon as they can afford to do it uh and you know and then a third of them are the kinds of you know doctors god bless them who love what they do and get carried out feet first at age 78 or so. And I fell into the first category. So when the opportunity came to do something that, you know, put me into contact with very intelligent people all day long, having fun conversations and dealing with fun concepts, then I left at the chance.

4:55So at what point did you say, hey, this is going to become financially remunerative, and I'm not just giving up a well-paying job, although it comes with a lot of student loans and obligations and debt, how long did it take you to reach that point where, oh, I can make a go of this? It took about three or four years from the time the first book came out and became apparent that I could make a decent living managing money in writing. I mean, who doesn't want to make their living, you know, writing. I mean, that's everybody's dream job. And it fell into my lap, I guess. So A, you're preaching to the choir, but B, most people don't love writing.

5:43And what's kind of interesting is how solitary the process of writing is. And all of us who write in public do so for that back and forth, for that conversation. For you, writing became a pathway to a career change. I had the same sort of experience. Did you have any doubts or fears? How did you manage that? Oh, my God. I still have a full-blown case of imposter syndrome. Really? Oh, my God. Yes, of course. I think I told you maybe several years ago about the experience I had of getting invited to a conference that was hosted by the BNI, the Directorate of National Intelligence. And here I am with these spooks and four stripers talking about national security.

6:32I mean, if that doesn't induce a full-blown case of imposter syndrome, I don't know what does. See, my assumption is that they're bringing someone in from a different field because very often knowledge adjacency and just seeing the world from a different perspective can provide insights to them. I mean, with luck, maybe that happened. I don't know that it actually did the way I dealt with it as I picked the subject, which was as remote from modern geopolitics as I can find. So I talked about the strategy, the geostrategy of the Athenian grain trade. Fascinating. And these guys aren't experts in that sort of history.

7:12And they're obviously military and national intelligence repercussions to that. So I don't I don't understand this imposter syndrome you're you're referring to. But let's talk about other mistakes. When you made this transition, were there mistakes made? How did you recover from them? How did you get past sort of being a novice with a non-traditional background in the world of investing? Well, before I started to take finance seriously, I made all the mistakes that rookie investors make. I invested in hot funds. I played futures and, you know, experience is a fine teacher. So you learn from those things.

7:59And of course, I learned, you know, in the past 20 or 30 years, I absorbed certain truths that I really didn't understand when I started out. I love, I think it's Howard Marks's line, experience is what you get when you don't get what you want. Right? Seems kind of appropriate. So along the line, what sort of tools did you create? Did you develop systems for managing assets and dealing with clients or checklists? Everybody has their own set of tools they use. What did you create? Well, I had an interesting experience, which is very early on, I understood the importance of maintaining a policy allocation and rebalancing towards it.

8:42So when one asset class did particularly well, you bought, you sold it to sell it down to its policy. And when it did poorly, you did the opposite. You bought and went back up to your policy. And one of the funds that I used was the old Vanguard Precious Metals Fund, which back in the day was a real honest to God, low cost gold and precious metals equity fund. And what I found was that simply by rebalancing it, the internal rate of return I got out of it was about 5 % higher than the time -weighted return. So in other words, I had a positive gap, not a negative gap. And I wanted to know where that 5 % came from.

9:34It didn't matter how I did it, whether I balanced monthly or quarterly or annually, or I used thresholds. Year after year, that 5%, some years it was 4%, some years it was 7%, but it averaged around 5%. Couldn't figure out where it came from. So I worked out the canonical math of it. And if you understand the mathematics of rebalancing, where that bonus comes from, then you understand asset allocation. And if you understand asset allocation, you understand finance. It's just that simple. So that was sort of the insight that I had early on that enabled me to write about finance. So to oversimplify that tool, when you're rebalancing, you're selling a little bit of what got expensive.

10:18You're buying a little bit of what got cheap. And is that where the magic percentage came from, where the bonus came from? With precious metals, it sure does. And precious metals is a special case. It doesn't work quite as well for the more common asset classes. But the really nice thing about gold and precious metals is that it is subject to animal instincts. So there are some time periods when you simply can't give gold or precious metals equities away. And people are saying this really doesn't belong in your portfolio anymore. I would read experts talking about, yeah, gold and precious metals really doesn't belong in your portfolio anymore.

10:56And then you have other times when the gold bugs are hopping, the bugs are quacking and they have to be fed. And those are the times when you feed them and you sell them and you sell your precious metals and your precious metals equities. I saw a wonderful article in the journal a couple of weeks ago. I saw that. I know where you're going. Yeah. And I saw this - John Paulson, right? Yeah. And it was about him and a number of other people. I think it's the same article you're talking about. And I saw a wonderful three word term, which is first time investor. Anytime you see first time investor around an asset class, you know that things are getting really frothy.

11:37So the funny thing is, as soon as I saw that journal article that referred to after the big short where Paulson, it was really one of his lieutenants is the guy who created that bet. Paulson just was the owner of the firm and Pagini, Paginini is the guy who had done that bet, made an ungodly amount of money and rolled it into gold. And that was 15 years ago. And the journal is saying the trade is finally working out. I'm like, trade? It's 15 years. The S &P has outperformed gold over the past 15 years by like 5X. How is this anything but a disastrous trade that's a little less disastrous? Yeah.

12:22It's funny that you mentioned that because almost exactly 15 years ago, Jason Zwag interviewed me about Ron Paul's portfolio, which was very heavy in gold and precious metals. Now, the article came, I believe, at the end of 2011, when gold was coming off of a run of very high returns. 1900 and change or so, if memory serves. Yeah. And, you know, Jason and I just got absolutely flamed in the comments section of that article. It verged, you know, pretty much towards overt anti-Semitism spots. and Jews and gold and all that. And that was a pretty good marker. And that was exactly the same time period that you're talking about.

13:13You start from 2011, it was a disaster. You start from 2015, gold's done very well, thank you. But gold looked very different in 2015 than it did at the end of 2011. Huh, it's pretty amazing that I guess, I used to think people's definition of long-term was too short. When someone says, well, I'm a long-term investor, I'm going to invest for a couple of years. I'm like, no, no, you got to think in terms of decades. And now 15 years is a trade that has worked out. It's really amusing, but let's bring this back to your career change. There are very specific skills that you bring to the table as both a medical doctor and a neurologist?

14:00Any of those skills transferable? How did you leverage that? Well, you would think that being a neurologist would help you with behavioral finance. It really doesn't because the everyday practice of neurology has almost nothing to do or relatively little to do with behavior. The kind of neurology I did is something that's referred to dysphagically in the parade as chicken neurology, which is necks and backs. Okay. Necks and backs. Okay. Yeah. And the way, you know, people talk to me about the neurosciences and about all these brilliant people, you know, Kahneman and Tversky and Sperry and Gazanaga.

14:37And what I like to say is, no, those guys are, you know, Da Vinci and Michelangelo. You know, I was Sherwin-Williams. So it really didn't, it really didn't help me all that much. Where it did help me was the basic scientific training. It taught me respect for data and for updating your priors. When the data contradict your deeply held beliefs, maybe your deeply held beliefs need to be reevaluated. Well, that's always a challenge. So let me throw out a touchy question at you. Doctors have a notorious reputation amongst finance people for being terrible investors. And my pet thesis is their nurses and staff all look up to them.

15:25Their patients think they're God. How on earth can those people bring any level of humility to a world that is so unknown and so challenging? Indexings is an admission. I'm not going to be a Warren Buffett or Peter Lynch. I'm not going to be a stock pick or a market timer. What's your experience dealing with doctors? Because you clearly don't fit that stereotype amongst a lot of financial advisors. No, doctors can be difficult. That's a fair observation. Surgeons tend to be more overconfident than medically oriented positions. Hey, we're cutting a person open and we think it'll all work out. How can you not be overconfident?

16:14Exactly. And then, you know, there's the gender aspect of it as well, which is male doctors are much worse. Most people are happier, by the way, with female doctors, probably for the very same reason as one of my neurological colleagues once, a female neurological colleague once told me that testosterone does wonderful things for reflex time and muscle mass, mass, but for judgment, not so much. Now that's, that's half of it. It's the overconfidence aspect, but the real reason, and I think actually even the bigger reason why physicians do so poorly is they don't treat it like a serious subject.

16:47Okay. You know, you wouldn't, you know, before you're even allowed near a patient, you have to master the basic sciences, you know, your anatomy and your physiology and your pharmacology and so forth. And they never bother to take the time. And the way I explain it to them is without treating finance as a serious subject worthy of academic study, they're trying to do brain surgery by reading USA Today. It just doesn't work. That's really, really insightful. So last question. If someone were going to ask you for advice about undertaking a career change, what sort of advice would you give them? Well, it's a complex bit of calculus, which is that you do have to be financially secure and change your career.

17:35One of my favorite New Yorker cartoons is the typical homeless guy in the street with the tin cup and his sign says, followed my bliss. So don't follow your bliss when you're too young. If you have to spend 10 or 20 years doing something you don't like to become financially secure, and you understand that money doesn't buy things, it buys time and autonomy, get that time and autonomy and become financially secure. And then you can do whatever the hell you want to do. Great stuff, Bill. Thanks. We have been speaking with William Bernstein, co-founder of Fish and Frontier Advisors and author of so many great books on economic history, Birth of Plenty, Splendid Exchange, Masters of the Word, Delusions of Crowds, on and on.

18:22You're listening to Bloomberg's At The Money.

18:34I got a bad case of love with you.

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