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White Coat Investor Podcast
WCI #450: When You Win the Game, Stop Playing with Bill Bernstein
00:57:31
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A
This is the white coat investor podcast where we help those who wear the white coat get a fair shake on wall street we've been helping doctors and other high income professionals stop doing dumb things with their money since twenty eleven.
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B
This is white coat investor podcast number four hundred fifty when you win the game stop playing with bill bernstein today's episode is brought to us by sofi the folks who help you get your money right paying off student debt quickly and getting your finances back on track isn't easy that's where sofi can help they have exclusive low rates designed to help medical residents refinance student loans that could end up saving you thousands of dollars helping you get out of student debt sooner sofi also offers the ability to lower your payments to just dollar one hundred a month while you're still in residency and if you're already out of residency sofi's got you covered there too for more information go to sofi dot com sofi student loans originated by sofi bank na member fdic additional terms and conditions apply and mls six nine six eight nine one all right we've got a great guest today you might know him his name's bill bill bernstein and i think you're really going to enjoy this interview but before we get into it there's a few things i want to make sure you know about you've noticed the new website by now i hope please if you have not been to the new website go by the new website our entire staff put in like more than a year's work to make up to date and serve you better so check it out if you're having trouble finding stuff we actually simplified the menus at the top of the website it should be even easier to find stuff than it used to be but if you don't want to go searching for the recommended list there you can just go to whitecoatinvestor dot com recommended you will find all kinds of recommended financial service providers from financial advisors to insurance agents to student loan refinancers mortgage companies contract reviewers realtors you know any anything that you might need from the financial services industry we have probably got a list of now occasionally i get asked for something really niche and i don't have it and i have to apologize to them by email but when i get those requests we start thinking can we put something like that up there and it's helpful to get those recommendations from all of you so you can get to that on the website or you can go to whitecoininvestor dot com recommended our quote of the day today is from jim rohn who said time is more valuable than money you can get more money but you cannot get more time all right let's get into the interview it's the moment you've all been waiting for let's find out what bill really means when he says stop playing when you win the game a lot of people over the years have asked for specifics on this so i tried to pin him down on what he really means when he says that my distinguished guest on the white coat investor podcast today is bill bernstein who hopefully needs very little introduction to our audience i've known about bill for more than two decades i've known bill personally for nearly two decades i think we met for the first time at a bogleheads conference in two thousand seven or two thousand eight it was a conference where jack bogle was actually sick in the hospital he spoke to us from his hospital bed but i didn't mind so much because i was so thrilled to meet bill i was a bernstein head before i was ever a boglehead bill is a renowned author of financial books is probably what he's known best for books like the four pillars of investing the investor's manifesto financial history books he's got a dozen or more titles i think also has worked as a neurologist and as a financial advisor but i think probably you're best known for your writing wouldn't you.
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C
Say bill yeah i think i probably am i remember that bogleheads quite well jack was in the icu with listeria meningitis and he's the only person i know who has actually survived that yeah.
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B
It was a pretty remarkable conference the fascinating thing is there were some pictures taken of katie and i there at the conference with one of our daughters who was about one at the time who's now in college so every time that picture pops up on the on the you know snapshot reel at the bogleheads conferences i'm always taken right back to that conference but at any rate bill i asked you to come on here because we're going to talk about a whole bunch of questions that people have about a phrase you've been saying for a long time which is stop playing when you have enough stop playing the game essentially and they want to know what you mean by that phrase they want me to pin you down to exactly what that really means so why don't we start by just throwing that concept out there and discuss it.
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C
For a while let's first start with what it doesn't mean which is that when you've fully funded your retirement you sell all your stocks no you don't do that the real hard part is how you define won the game and i define winning the game as being able to pay with safe assets that is treasuries tips spias you have it for your basic living expenses we're not talking about buying beamer or flying first class we're simply talking about paying your groceries and your housing expenses and for your car and for your medical insurance and some other essential things and for most people that's not a huge amount of money so when you have twenty five years of those expenses paid up you start taking some risk off the table and you start defeating that with safe assets and my favorite safe assets in order of preferability are a tips ladder to cover your basic expenses that's after you've gotten your social security check and your maybe if you're lucky a pension and start defeating that with those kinds of safe assets tips spia and then the rest of it is your risk portfolio and that goes to your bequests to your first class travel and other bucket list items you have yeah.
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B
So for those for whom we're talking over your head already tips of course are a treasury inflation protected security it's a type of a treasury bond a loan to the united states treasury but it's indexed to inflation which makes it unique from most treasury bonds and a spia of course is a single premium immediate annuity and essentially a pension you're buying from an insurance company you give them a lump sum of money and they pay you a certain amount of money every month until you die bill a few years ago you could buy an inflation indexed spia you can't really do that anymore as far as i know does that change how attractive a spia is as a safe asset in.
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C
Your mind yes it does and it's interesting to think about why they disappeared they disappeared in the year twenty nineteen i think new york life was the last one who offered it and they disappeared because no one wanted to buy the things okay why didn't they want to buy them well because you could buy a regular spia a regular annuity and get a seven percent upfront let's say you're sixty five years old or seventy years old you could get a seven percent upfront payout while an inflation adjusted annuity only pays four percent because it has to adjust for the fact that the payout increases with inflation and it's a behavioral anomaly it's a behavioral error because yes you're getting seven percent upfront but if every year inflation is three percent every year your spending power goes down by three percent and if we have inflation higher than that then within ten or twenty years you've got funny money all right in ten or twenty years from your regular spia whereas the inflation adjusted annuity will keep up with that and that was the preferred product but no one wanted to buy them because the initial payouts were so.
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B
Low was that really the reason no one wanted to buy them i assumed the insurance companies didn't want to take on the inflation risk no it's a.
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C
Very easy thing to if you're an insurance company it's a very easy thing to protect yourself against you simply buy a portfolio of tips and then you annuitize that out and you've given mortality credit on top of that it's riskless for an insurance company if you're if you're defeating it with tips you know.
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B
It'S maybe it's not such a bad thing to have a little bit more money early you know real money i'm talking inflation adjusted money early in retirement those are your go go years right you've seen the graphs of the retirement smile people tend to spend more you know in their sixties than they do in their seventies is that such a bad thing that they're now getting less a decade later due to inflation yeah.
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C
When you actually dig into the data on the smile and you're talking about david blanchett's famous smile paper what you find is that for people who actually have adequate assets that smile disappears so yes you can tell and you can spin a narrative about go go years and slow go years and no go years but it turns out that when people have enough assets their spending doesn't decrease into their seventies and into their.
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B
Eighties so they're decreasing cause they have.
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C
To exactly exactly and that's to me one of the untold stories of this myth that you spend less as you get older no you don't if you have the money you're going to spend.
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B
It okay let's get back to enough your definition of enough is to have a sum of money that covers all your necessary expenses and you're saying when you get to that point you should put that much money into safe assets or what's the how's the transition work we're saving along here with a you know sixty forty portfolio or an eighty twenty portfolio and i get you know my necessary spending is one hundred thousand dollars a year and i get to two point five million what do i.
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C
Do then you start to very slowly unload some of your risky assets and you start to replace those with riskless assets and that primarily being that ladder of inflation adjusted securities the treasury securities and also the spia the immediate annuity i have nothing against spias as long as you've got some inflation protection on top of them and so you start doing it very slowly you don't do it all at once now it's important to realize who this does not apply to okay if you're a pension aristocrat if you're someone who's got a nice government pension and social security on top of that and you can meet all of your basic expenses with the pension claim and the pension payout and with the with your social security let's say just for take a hypothetical example you're a retired military doctor okay this doesn't apply to you at all because your investment assets really don't belong to you they belong to your heirs and to your charities okay now the next person this doesn't really apply to is the person who's got a very low burn rate and that's the most important question you have to answer is what is your burn rate going to be if your burn rate is less than two percent if you've got a five million dollars portfolio and you need less than one hundred thousand dollars after your pensions and your social security then you can make that two percent payout simply from the dividends on stocks so theoretically you don't have to own any bonds or spias or dips or anything maybe just a very small emergency fund for when your car needs repairing or you need a new refrigerator that doesn't apply to that person as well it applies to the person who looks like they're going to have a four or a five or a six percent payout because that person if they own too much stocks their first five or ten years in retirement is subject to something called sequence of returns risk which you informed me several months ago comes with a bunch of hyphens in the middle of it that's what you want to avoid you want to avoid a five or six percent burn rate and then seeing your portfolio fall by five percent or ten percent per year over the next ten years which can happen okay and if that happens you run out of money.
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B
Before the markets recover so a tip slider right i mean i kind of i don't know two or three years ago i got all excited about building a tip slider and i had a treasury direct account and so i started buying tips at auction every six months or something and i think i bought eight or nine lots of tips and then i told katie about what i'd done i said well this is what we have you know if something happened to me like i fell off a mountain and smashed up my head is this the sort of thing you'd want to be dealing with or not and she was very clearly not she didn't want to deal with that sort of a thing do you think it's worth the complexity for most people to build a tips ladder or should they call it good enough if they just put it into a tips fun that's a.
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C
Very good choice setting up a tips ladder is complex if you're interested in doing it there are websites that will help you do it tipsladder dot com will show you exactly what to buy okay now i don't think there's any complexity when it comes at the back end once you've set it up it's fire and forget i have for example shown my adult children what my tips ladder looks like and i have told them you've got these tips maturing every year and this is how you're going to pay for my nursing home expenses and they are financially competent enough to understand what that looks like now the key question is are your kids familiar with dealing with financial services corporate companies and if you've done things right they have their own accounts and they know how to deal with them and they know how to deal with a brokerage account and they know what happens when a treasury matures okay that's the key thing if you're not familiar with that no you probably shouldn't have a tape.
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B
Slider and what do you think you think it's worth building it on treasurydirect and buying them at auction or do you think you should just do it in your fidelity your schwab or your vanguard brokerage account yeah i mean treasurydirect.
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C
Makes my heart freeze every time i log onto it i've been locked down i close my account the second or third time it locked me out because the last thing i mean it's hard enough for you to deal with it you or i to deal with it when we have all of our marbles if we lose our marbles you're not going to be able to deal with it and more importantly your kids may find it almost impossible to deal with your treasurydirect account i don't use treasurydirect for that reason i only buy tips in a brokerage account and i only do it with my tax deferred money i don't put them in a taxable account that's where stocks belong yeah so.
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B
If you had an account that was eighty percent taxable you'd leave them out of the portfolio just to avoid the phantom income phantom tax issue or what would you do if you were taxable ted from the four pillars of investing.
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C
Book i probably wouldn't own tips i would just keep it in short duration treasuries if you had if only twenty percent of your assets are sheltered then that's where the tips go and maybe you fill that up entirely with tips and have a more conventional portfolio on the taxable side now i think i'm talking to an audience mainly of physicians and so physicians tend to have a fairly decent sized sheltered account most of the physicians i've talked to most of their assets in fact are sheltered so tips are ideal for that population if you're the kind of person who had ten million dollars dropped on you with the sale of a corporation and that's all taxable money you probably should not be putting most of your assets into tips certainly not on the taxable side.
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B
Now a common term used out there and i think you've used this a lot is a liability matching portfolio an lmp can you explain what that means and how somebody might go about constructing.
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C
One of those well let's say for the sake of argument that you are a retired physician and that your living expenses are let's say to be conservative one hundred thousand dollars a year and let's say you're getting forty thousand dollars of that from your social security and whatever pension you have which is going to be about right i mean if you're someone who's high income you're going to be really lucky to have a replacement rate of forty percent from social security because of the way the bend points are structured so now you need sixty thousand dollars a year well if you're sixty five years old i like to have twenty five years in my liability matching portfolio let's further assume that only half of that sixty thousand dollars is necessary to pay for your basic living expenses so the one hundred thousand dollars you're visiting the grandkids you're flying first class every now and then maybe you have a nice car but thirty thousand dollars to get to seventy thousand dollars is all you including your social security and pension is all you need to keep yourself in groceries and from being under a bridge all right so that thirty thousand dollars times twenty five years is seven hundred fifty thousand dollars that is your liability matching portfolio that's the money that you need to pay your basic living expenses so that's a tip ladder of seven hundred fifty thousand dollars or a spia can be part.
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B
Of that as well okay so let me give you some questions i collected off the white coat investor forum people wanted me to ask you and i think we've covered significant number of them already and let's just clarify this one because i think i know your answer and i think you alluded to it earlier but the question is when we're talking about stopping playing the game what level of wealth is that advice targeted to twenty million versus four million or if it's relative at what withdrawal rate does the advice become relevant one two three percent i think your answer was that it's really not about how much wealth you have it's about the ratios and that it becomes relevant as you get closer to a four percent plus withdrawal rate correct yeah it all has.
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C
To do with burn rate if your burn rate is five percent it doesn't matter whether you're spending five thousand dollars of one hundred thousand dollars nest egg or if you're spending five hundred thousand dollars of a ten million dollars nest egg five percent is five percent yeah.
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B
Absolutely okay so a lot of people their big concern about putting that much money in safe assets is that probably they're leaving money on the table right because stocks will probably do better than all those safe assets over the remaining period of their life what do you respond to that criticism of this advice.
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C
They'Re absolutely right five out of six times you will do better with stocks than with a liability matching portfolio of safe assets but we're talking about apples and oranges one is safe assets the other is risky assets and i would point out to them five out of six times when you play russian roulette.
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B
You win yeah fair point you don't.
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C
Want to play russian roulette with your retirement because the consequences are asymmetric yeah.
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B
Another question it sounds like it's probably more personal than hypothetical which is how it's phrased but they ask what asset allocation do you recommend for an investor who retires at fifty five with five million in assets and what would you consider to be the safe withdrawal rate for this investor well the very best.
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C
Way to look at it is to look at your joint life expectancy you and your spouse that's the way the irs does it when they calculate rmd's which of course those don't start until you're seventy two but what's your joint life expectancy of a couple who's fifty five years old good grief it's about forty years so one over forty is two point five percent and even then if you take two point five percent of your portfolio out every year there's going to be some variability in that which is not good so what i would do is i want to take some of that variability out i would start with a two percent withdrawal rate and then raise that with inflation so the answer is if you're trying to retire at age fifty five you better be able to make do with two point five or better yet a two.
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B
Percent withdrawal rate that's an incredibly conservative recommendation based on past performance of markets if you look at data such as that published in the trinity study you know on average if people withdraw four percent index to inflation every year thirty years later they've got two point seven times what they retired with you know so if they're only taking out two percent i mean they have very lucky heirs the likelihood is their heirs are going to have a massive inheritance and that they will dramatically underspend what they.
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C
Could spend yeah when i hear that reasoning sort of reasoning it kind of makes me want to reach for my revolver because the returns that we're talking about here were returns that were obtained by basically tripling the valuation metrics of stocks so when the trinity study starts in nineteen twenty seven with data starting in nineteen twenty six well good grief stocks were yielding five percent then well we've now gone from stocks going from a yield of five percent to a yield of one point three percent so that's a factor of four so in order to maintain those returns that means that valuations would have to rise by another factor of four over the next several decades so what you count on when you count on maintaining those returns what you're basically predicting is that forty or fifty years from now stocks are only going to be yielded yielding zero point three percent i don't think so i don't want to bet on that.
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B
How much of that has been changed by the fact that stock buybacks seem to be a lot more popular in recent years than paying out dividends isn't the effect really the same and maybe even better after taxes for the company to be buying back its stock rather than paying dividends to the investors yeah.
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C
That violates the miggly annie miller rule which is that if they're buying back their shares with one or two percent of their earnings then that is money they can't invest in their business so that's going to slow down their earnings growth there are no free lunches here it's not like the stock market buys back two percent of its value every year and that's free money for you no that's money that's not available for investment it's going to hit earnings growth and by the way stocks you know there are buybacks but counterbalancing that is stock issuance so there's roughly two percent net stock issuance every year there's two percent buybacks so that nets out to.
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B
Zero not really a good explanation for expecting higher stock returns yeah yeah that's.
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C
Another fairy tale yeah okay speaking of.
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B
Stock returns we're recording this in november of twenty twenty five the us stock market and particularly international markets this year have had another banner year after a twenty five percent return in twenty twenty four and a twenty five percent return in twenty twenty three this is all led by the mag seven stocks the stocks benefiting from ai what do you think are we in an ai stock bubble and if so should we do anything about it i think it's more.
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C
Likely than not and the easiest way to think about it is that for example sam altman talks about if you want to get to talk about optimists sam altman talks about the need to spend five trillion dollars on infrastructure okay well the problem with the infrastructure for ai is that it's computer chips that depreciate in value faster than ice cream on a hot summer afternoon these chips are going to be obsolete in twenty four to thirty six months so if you calculate the return you need given the depreciation of that capex that five trillion dollars of investment is going to mean that you're going to have to generate one trillion dollars of cash flow or of earnings every year and you translate that into how much people have to pay for ai services you're talking about several hundred one thousand dollars worth of at least of ai expense every year how many people in this you know who are listening to this podcast would be willing to spend one thousand dollars a year on ai not very many of them so i you know it's possible it's possible we're going to hit a singularity and earnings growth will explode i think it's more likely we are looking at the sort of bubble and bust that we saw back in the late nineties but but i could be wrong you don't know there's a lot of uncertainty here but i sure wouldn't want to bet my retirement on ai panning out now there's something else which is going on here we might as well get out into the open which is it's not just a couple years of great stock returns twenty twenty five marks the half century mark for the beginning of the greatest bull market in financial world financial history us stocks have returned since nineteen seventy five about eight point four percent real after inflation that is simply unheard of and the zeitgeist that is out there is people saying i'm investing only in stocks for the long run i'm not investing in bonds they're for idiots because their returns are slow low i'm one hundred percent in stocks and everybody i talk to brags about being one hundred percent in stocks well i'm old enough to remember what things look like not just in two thousand had died but i'm old enough to remember what things looked like in nineteen seventy four all right or in nineteen eighty two or nineteen seventy nine when businessweek wrote about the death of equities there weren't a lot of people back then in two thousand nine or nineteen seventy nine bragging about being one hundred percent in stocks yeah for.
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B
Sure so if this is you know the closest comparison we can make is to the to late nineties dot com kind of era are we in nineteen ninety six or are we in nineteen ninety nine beats the heck out of.
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C
Me it could be either one i mean the trouble with bubbles is they can run for a very long period of time and i think the phrase that covers this best is i can tell you what will happen i just can't tell you when and even when it does happen over the long run stocks will still probably return more than bonds i'm not selling all my stocks because i want to get better returns than bond returns but my tips ladder now yields about one point seven one point eight percent real and i can easily see ten or twenty years of returns being lower than that now you've.
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B
Used a method in the past for estimating future stock returns remind me it's basically dividend yield plus earnings growth is there anything else in it other than the speculative factor that can go back.
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C
And forth yeah it's simple addition you're adding two numbers so earnings growth optimistically is going to be about two percent or dividend growth is going to be optimistically about two percent real because that's what it's been for the past twenty or thirty years and there's now a one point two percent dividend so you add those two together and you get an expected stock return of two point three percent now the trouble is that's a forecast not a prediction and forecasts have very large error bands and if you just simply do apply simple statistical model that means that the returns over the next thirty years can be anywhere between minus two or three percent on up to seven or eight percent you.
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B
Just don't know now if we went back ten or fifteen years and you use that method to forecast returns over the next ten or fifteen years our returns particularly in the us market particularly in these large growth stocks are dramatically higher than that what should an investor take from that occurrence what should they be saying should they be saying oh i got to get out of these stocks now are they saying oh bill's just a perma bear i'm going to quit listening to him what should they take away from the fact that returns were so much better then that sort of a forecast would have led them to believe ten or fifteen years ago.
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C
Well that's because what you take away from that is that ten years is a very short period of time just applying race and statistical model to it the standard deviation of stocks is sixteen percent then the standard deviation at ten years is going to be a bit more than five percent okay well plus or two minus standard deviations gets you error bars that are twenty percent wide ten percent here on the upside ten percent on the downside so ten year returns don't mean anything now if you want to talk about ten year returns let's go back to the year two thousand eight when you take the stock returns from the beginning of nineteen ninety nine to the end of two thousand eight that's ten years the real return of stocks for that ten year period was something like minus three percent per year that can happen so if you want to cherry pick your data you can cherry pick it both directions yeah.
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B
For sure okay there are a lot of people out there that advocate for having not twenty five years of assets and safe investments but more like three to five years or three to six years almost a bucket like approach to dealing with sequence of returns risk i think the idea is if terrible stock market things happen for the next three to six years you're going to just spend the money from the safe assets what's your response to that crowd when they say i don't need twenty five years of safe assets i only need three to five years in safe assets.
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C
Yeah stress test that portfolio when you're talking about three to five years of safe assets you're talking about basically an eighty or ninety percent stock portfolio okay stress test that let's say eighty five percent stock portfolio beginning in the year nineteen sixty six and what you find is that with a burn rate that's anything much in excess of four percent you run out of money so that's the risk is that you run into that sequence of returns risk where you get the bad returns first nine out of ten times that doesn't happen but i'm personally not willing to take a ten percent chance of that happening yeah.
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B
Okay the other thing that has not been cool for the last fifteen years is small value tilting for at least fifteen years might be up to twenty now that has underperformed kind of a total market approach to investing what are your thoughts on small value tilting at the end of twenty twenty five you.
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C
Need a very long time horizon and the easiest way to analyze that is and you can make an even bigger objection to it is that it's what i call rackenthaler's rule after john rackenthaler of morningstar which is if the bozos know about it it's not going to work anymore so fama and french published their study which showed the high returns of small value stocks in nineteen ninety two and in nineteen ninety three they set up a small value fund at dimensional fund advisors so you can look at the live returns of that fund this isn't some theoretical index this is a real mutual fund based on their strategy and it handily since nineteen ninety three or nineteen ninety four this handily beaten the s and p five hundred how did it do that well it did that with baffo returns for the first fifteen years and poor returns for the last fifteen years so again if you let me cherry pick the data i can show you that any given return is either a runaway winner or.
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B
An awful loser so somebody designing their portfolio today maybe after an era of large growth outperformance do you think they'd be wise to add a small value tilt to the portfolio or would they be better off sticking with that total market approach i would put it in.
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C
Terms of odds or statistics i think that a small value tilt to your portfolio is maybe a fifty five forty five bet all right so you can do it and there's a forty five percent chance you'll come out behind the question is are you willing to make that bet i am but i'm prepared for it not to pay off yeah.
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B
I like the way you phrase that being prepared for it not to pay.
- [34:43]
C
Off now there's one other thing i want to talk about small value though which is that it's actually worked very well abroad even over the past ten or fifteen years all right and why has it worked better abroad than in the us well the us is only one market and in one market there's a lot of noise okay but if you own an international or an emerging markets small value portfolio you've got many different countries many different markets and that noise averages out over shorter periods of time so over a five or ten year period an international small value tilt is much more likely to be a winner than just a us only one.
- [35:21]
B
Good advice make sure you're doing it on both sides of the border okay let's talk just for a minute maybe a little bit more philosophically we've talked a lot about nuts and bolts and portfolio construction and so on and so forth but let's talk a little bit about life after enough hopefully most people who listen to this podcast for a long time who've been white coat investors who have you know a career of any significant length in medicine and saved and invested wisely during that career will have more than enough what advice do you have for them both how to invest as well as how to live after they hit enough well you just.
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C
Said the three magic words which is more than enough which is the title of a marvelous little booklet which i think you can get for three or four dollars from mike piper who we both know quite well and admire and he talks not only about values and what your values should be looking like when you're when you're when you're that when you're when you have more than enough and it's also probably the best single estate planning guide that i've ever seen it's very easy to understand and he gives you priorities as to how to give away your money and what money to you know how to allocate your assets among your different your different pools among your bequests and among the money you're going to spend on your on your own and it's all about your values okay i mean if you think that money is to buy stuff then you're going to have a miserable retirement the money is there because it buys you time on autonomy to do the things you want to really do money is not there to buy you the beamer or the mcmansion it's to buy your time with your grandkids it's to give to your charities and it's to do the things that you really want to do with your life that you may not have done during your working career because you had to earn the money and you may not have liked what you had to do so.
- [37:33]
B
That'S what it's all about bill have you read the book by bill perkins die with zero no no i have.
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C
Not but i react viscerally to the title but maybe you can convince me.
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B
Otherwise that was my first reaction as well right because i thought oh this is about spending it all before you go and while that's discussed a little bit and he actually talks about why it can be a little bit difficult to do that mostly the focus in the book is recognizing that it's a whole lot easier to turn money into fun at thirty five than it is at eighty five and he points out that there are chapters of your life that that you can read a book to your kid when she goes to bed when she's six years old but when she's sixteen she does not want you to do it if you didn't do it when she was six you have missed that chapter you've missed that experience that opportunity make sure you're taking advantage of those as you go through life and recognize that there are some times in life to spend besides just retirement and you've got to balance the needs of current you with future you lately now there are some other criticisms that can be made of the book but that's kind of the basic ideas behind it how would you recommend people.
- [38:49]
C
Figure out that balance yeah well obviously you don't want on your tombstone that he spent forty hours a week in the or you don't want that on your tombstone you want your kids you have to ask yourself what are my kids going to say about me at my eulogy or are they going to want to speak at my eulogy and that's the single most important thing in your life is your kids and if you're religious your religious affiliation those are all very important things those are much more important things than the money in your life or the gadgets that you own so if you can use your money to purchase those things then i'm all for it and gosh i'm going to go out and buy the book or at least because i'm a mobile head try to reserve it at the library.
- [39:41]
B
Yeah i think you'll enjoy it more than you thought when you saw the title because i had the same reaction to the title that you did and i think you'll appreciate the book you'll find a few things to criticize in it for sure but you will i think enjoy it and find it.
- [39:56]
C
Worth reading and by the way just one thing if i can continue my anti materialist rant there is a theory out there called consumption smoothing that you should be having a level of consumption throughout your level level of consumption over your entire life and that is neuropsychologically illiterate because there's something called the hedonic treadmill all right and if you get used to flying first class when you're thirty five by the time you're fifty you're going to want to fly drive it and that is the road to.
- [40:29]
B
Bankruptcy amen to that especially because it involves all kinds of leverage risk as well usually it means borrowing a whole bunch of money early in life and and sometimes that blows up on you it's interesting when you hear about people losing large amounts of money barring fraud it's usually as a result of just taking on too much leverage risk and that's basically advocating doing that for your entire life so not a big fan of consumption smoothing either okay we talked a little bit about this but i think people would like to hear a little bit more about your response to the hundred percent equity crowd you mentioned that we're hearing it more than ever the last time i heard it as much as it's going on now might have been the nineteen nineties that people are saying one hundred percent stock you know you're taking on too much longevity risk having money in bonds what would you say to someone that's coming to you maybe they've got half a million dollars invested they're thirty five years old and they're saying i think i ought to be at one hundred percent equities not only now but probably later too what discussion would you have with a young doctor making that case to you in the doctor's lounge i would say.
- [41:48]
C
That theoretically that he or she is one hundred percent correct if you are a thirty five year old doctor you probably have ten million dollars of human capital ahead of you which medicine's a fairly safe profession and you're a bond okay so you've got ten million dollars worth of bonds and if you've got a half million dollar investment portfolio theoretically that should be one hundred percent in stocks all right on the other hand when you're sixty five years old and got good lord willing and the creep don't rise you're retired then you don't have any human capital left and so you want to be a little more careful with your allocation so the question i would ask of that thirty five year old doctor is have you ever invested through a real bear market and the answer was always going to be no unless they were investing from the time they were twenty and they were heirs and they inherited a lot of money when they were fifteen so i would say to them well okay you can invest one hundred percent in stocks just see what happens with the next bear market see how you really feel and there's a wonderful quote which you've heard me say many times jim which comes from fred schwed's marvelous book where are the customers young which is there are some things that cannot be explained to a virgin either by words or with pictures more than any words that i can describe to you here describe what it feels like to lose a real chunk of money that you used to own so it's one thing vaporizing fifty percent of your net worth in a spreadsheet it's another thing watching it happen to you in real time with.
- [43:29]
B
Real money it's not a logical experience when you lose that money that you invested instead of using to upgrade the.
- [43:36]
C
Kitchen yeah there are a lot of really good investment analogies that have to do with aviation but the analogy i use is i can go into an aircraft flight simulator and dial in an aircraft fire and i can see how i'll respond as a pilot i can guarantee you i'm not going to respond as well when i see flames licking.
- [43:58]
B
The cockpit yeah for sure okay another question from the crowd and we talked a little bit about this but the question is i for one would be very interested in hearing how bill thinks liability matching stacks up to his famous advice to stop playing the game my impression is those are kind of the same thing but how would you respond to that question well you want to.
- [44:24]
C
Lie you know accept except for the exceptions that i talked about the person with no burn rate or a very small burn rate you want to liability match your basic living expenses you want to avoid running out of money because your portfolio was too heavily invested in stocks and you ran into a bad sequence that's what liability they are the same thing that's what liability matching is.
- [44:48]
B
All about okay i've got an article up here that just came out this month i believe it's got your name on it and ed mcquarrie's name on it and the title is the peter bernstein rule beware empty memory banks what message were you trying to get across to people when you tell them beware of empty memory banks well the thing.
- [45:10]
C
That triggered the article was another article that i had read in the economist about a strategy that was popularized by barry nalibeuf and i forget his first name vic ayers i think and the strategy is that feeds off the example i gave much earlier which is the person who's got huge amount of human capital and a very small investment capital and what they recommend that person do is not just invest one hundred percent in stocks but invest two hundred percent in stocks and the economist article was written because that strategy has gotten a whole lot easier than when nalibuth and ayers first wrote their book on it fifteen years ago and they described a thirty five year old who was executing the strategy and when ed and i saw that article we had to stifle a laugh because someone who's thirty five years old by definition has never lived through a real bear market and has been completely margined out by a fifty percent loss in stocks if they're one hundred percent margined and that thirty five year old investor if you if the market falls by fifty percent as it did almost did from nineteen seventy three to nineteen seventy five or by more than fifty percent between two thousand seven and two thousand nine that investor got completely wiped out almost certainly that guy is going it is a guy because they identified it as male in the article and only men are stupid enough to do something like that the data.
- [46:47]
B
Is very clear that women are better investors than men every time they study it it looks that way yeah one.
- [46:53]
C
Of my female colleagues liked neurology colleagues liked to say that testosterone does wonderful things for muscle mass and reflex time but not so much for judgment and so that's what we were writing about is that investor has never lived through a bear market they've never had the experience of losing a real chunk of money that they used to own and only someone who has never had that experience would ever think that it's a good idea to be two hundred percent in stocks so that's in other words the bottom line is in memory his memory banks were totally devoid of bear market real bear market experience and the memory bank was something that was popularized by a guy named peter bernstein who unfortunately was no relation to me now.
- [47:36]
B
You'Re glossing over a few events in the last fifteen years i mean there was about a twenty percent drop in stocks in twenty eleven again i think in december twenty eighteen of course march twenty twenty had some rather interesting events and when interest rates went up four percent in twenty twenty two stocks dropped relatively precipitously as well how come you don't think those qualify as real bear.
- [48:01]
C
Markets because they recovered so quickly all right i mean what happened in march of twenty twenty i think that entire sequence lasted for it lasted over less than two or three weeks and twenty twenty two that's still a walk in the park compared to the other bear markets that i was talking about i'm talking about bear markets that saw long lasting returns from a loss of half a value over eighteen months or twenty four months that's a completely different experience.
- [48:38]
B
Even two thousand eight two thousand nine it was really going on what august to march was really the dropping kind of recovered right at the end of the year and then dropped again through march that was a relatively short time period compared to the grinding two thousand to two thousand two bear market yeah.
- [48:55]
C
Although it still took you about six or seven years to get back to.
- [48:58]
B
Par.
- [49:01]
C
So that was still a fairly grinding experience nineteen twenty nine and nineteen fifty three that was seventeen years to get back to par to get back to par after after twenty eighty two that took another eight or nine seven or eight years i think so the sorts of experiences that you're talking about were picnics compared to what the markets can really dish out over the long.
- [49:27]
B
Term yeah and this doesn't even look at international markets which historically have far more interesting events than us markets have.
- [49:37]
C
Had of course yeah like japan i think we're just back to paris in japan from what happened in nineteen ninety started in nineteen ninety so we're talking about thirty five years to get back.
- [49:49]
B
To par yeah now you made a case for that every investor really ought to study financial history this was a major pillar in the four pillars of investing book that you wrote two plus decades ago do you feel any differently about the importance of knowing financial history today is it even more important than it used to be do you think now that we've got another twenty years.
- [50:11]
C
Of history yeah you've stolen my punchline which is i've changed my opinion dramatically which is it matters even more and it matters both on the upside and the downside and the most important key thing you take away from financial history is that the most dangerous times the times when your long term risk the deep risk is the highest is when there's plenty of blue sky out there and that conversely the best fishing is done in the most trouble the most profitable purchases that i've made i made at a time when i felt like.
- [50:46]
B
Throwing up now i'll bet that of all the books you've written the one that has been read the most times is if youf can which is a sixteen or seventeen page pamphlet pdf mostly that you gave away for free tell us about the origins of that book why you decided to write it and if you have any idea how many times it's been downloaded or read et.
- [51:13]
C
Cetera well the last question i have no idea how many times it's been downloaded but i would not be i'm reasonably sure it's between two hundred thousand and a half million and i wouldn't be surprised if it was downloaded a million times it's done very well because it's free i gave it away for free out of guilt for being a financial professional and having such a good living for it i wanted to embark upon an eleemosynary project i still get one or two emails every month for people thanking me for saving their financial life with that little booklet it's been a very gratifying experience of all your.
- [52:00]
B
Books which one was your favorite one.
- [52:01]
C
To write oh splendid exchange which wasn't a book that had anything to do with or very little to do with finance it was the history of world trade it was an enormous amount of fun to write and it's also gotten me invited to some very interesting conferences one on marine archaeology another i got invited to one on fashion although it had to be canceled because of the financial crisis and i even got invited to one in washington dc that i could tell you about but then i'd have to shoot you you.
- [52:39]
B
Well very interesting bill this is probably going to be listened to by thirty or forty thousand people mostly high income folks most of them in their thirties forties fifties is there anything we haven't talked about today that you feel like ought to be emphasized in their lives.
- [52:59]
C
It'S something that can't be said often enough which was said by a very wise guy which is when you're fresh out of training live like a resident.
- [53:11]
B
Thank you i appreciate that all right this has been an interview with bill bernstein if you've never read his books you should go read them all they're fascinating and very helpful in assisting you in building wealth and reaching your financial goals so you can concentrate more on the things that matter most to you in life thank you bill for your time on the podcast today it's my pleasure this.
- [53:33]
C
Was great fun let's do it again.
- [53:36]
B
All right i hope you enjoyed that interview as much as i do i always love talking to bill it never makes me feel like i'm the smartest person in the room for sure but i always learn something and gain some new perspective people have called bill a perma bear over the years and not quite so much as other people but he's certainly a realist and he's certainly a financial historian he knows his history seen what has happened in the past and he understands that it can happen again because it typically does history doesn't always repeat but it often rhymes and there is certainly not even a guarantee but not even a likelihood that the returns we've seen in twenty twenty three and twenty twenty four and twenty twenty five are going to continue for one two three five more years it's just very unlikely that it's going to happen so if your expectation of your investment returns is anchored in the last few years i would caution you to recognize that that's not normal and it's far more normal to have a real after inflation return from stocks more on the order of four five maybe six percent than eight nine or twelve percent like you might have seen in the last few years and when you recognize that bond returns don't look so much dramatically lower than what you're getting out of the stocks and once you adjust them for risk maybe you're not as unattractive as you might think cautiously build your investment portfolio your asset allocation recognize that it needs to be able to reach your financial goals despite passing through a significant number of potential future economic outcomes fund it adequately stick with it for the long term and you'll be surprised how well it does over the course of your earning and investing career as i mentioned at the beginning of the podcast sofi could help medical residents like you save thousands of dollars with exclusive rates and flexible terms for refinancing your student loans visit sofi dot com whitecoatinvestor to see all the promotions and offers they've got waiting for you one more time that's sofi dot com whitecodeinvestor sofi student loans are originated by sofi bank na member fdic additional terms and conditions apply nmls six nine six eight nine one don't forget about that recommended list i mentioned whitecoatinvestor dot com recommended whatever you're looking for and we've got it there whether it's books whether it's financial advisors whether it's real estate investing companies we've got some firms there you can check out thanks for leaving five star reviews not just because we like to hear how awesome we are all that's kind of fun too mostly because we know they spread the word about the important information we're talking about on this podcast a recent one came in said real deal this guy knows what he's talking about no hyperbole no scams just a common sense evidence based and rational guide to personal finance and investing i've been listening for two years it would have saved me literally six figures had i discovered them earlier oh well better late than never definitely geared toward high income earners but anyone will be wiser and smarter with their money by listening to this one five stars very kind review thank you for leaving that keep your head up shoulders back you've got this the whole white coat investor community is standing by to help you be successful in your life in your career and with your finances we'll see you next time on the podcast the hosts.
- [57:11]
A
Of the white coat investor are not licensed accountants attorneys or financial advisors this podcast is for your entertainment and information only it should not be considered professional or personalized financial advice you should consult the appropriate professional for specific advice relating to your situation.