William Bernstein on personal finance, investing, and history


Rohan: Bill Bernstein is one of my favorite authors. I loved his book “A Splendid Exchange” and recently read his book “The Investors Manifesto” as I began piecing together a thesis on investments.

I am glad I reached out to him as he’s among the friendliest people I’ve had the fortune to meet. The interview was full of funny quips and piercing insight.



About William Bernstein

William J. Bernstein is an American financial theorist. His research is in the field of modern portfolio theory and he has published books for individual investors who wish to manage their own equity portfolios. He has written several best selling books including ‘The Birth of Plenty’ and ‘A Splendid Exchange’.

Bernstein holds a PhD in chemistry and an MD; he practiced neurology until retiring from the field. He lives in Portland, Oregon.

Interview Transcript


Rohan:  I was inspired to interview you because of two books. First is A Splendid Exchange, one of the best books I’ve ever read, and the other is Investor’s Manifesto.  I’m looking forward to getting to know your story as well as an understanding of why you do what you do. How did you end up doing what you do now, why did you take up writing, and more specifically writing about finance and history.  What’s the story?

Bill:  Well, it’s basically a shaggy dog story.  I practiced medicine in the United States for a long time and this is a country that doesn’t have a functioning social welfare system, so you have to save for your retirement.   I did what I thought any person with scientific training would do – which is to read the peer-reviewed literature about finance, and to read the best academic textbooks. And I had hoped that would tell me what to do.

It didn’t really tell me exactly what to do, but it told me that I had to do some more things, which were to collect my own data and to run my own models.  That turned out to be a chore because 15-20 years ago, the data that I needed weren’t available.

It was beg, steal, or borrow. So I did that and then I learned to spreadsheet it all.  Most doctors don’t know how to use spreadsheets, or at least they certainly didn’t 20 years ago.  I began building my models. Once I was done, I had figured out exactly what I was going to do with my investing career. I also realized that I had figured something out that other small investors would find useful.  So I began writing finance books.

The first one was the Intelligent Asset Allocator and it took about three or four years to finally get published.  You discover that when you write about finance, you have to know history.  It’s just like military science in that regard.  If you don’t know the history of what you’re doing, you’re dead in the water.  This is what happened in 1998 with long term capital management.  They were brilliant people in finance but they quite obviously didn’t have a working knowledge of financial history.  They didn’t realize that the system became chaotic from time to time and all the usual relationships would break down.  This is something that becomes very obvious very quickly if you understand financial history.

I discovered I enjoyed writing history, and after writing a couple of finance books I went to my publisher  and said that I’d like to write a history of the world economy.  They gave me encouragement to give it a crack.  I wrote The Birth of Plenty, which succeeded well enough that it became a calling card for A Splendid Exchange, which was the book that you finally read.



Rohan:  You’ve written a lot of great books.  The Four Pillars and the Investor’s Manifesto are popular ones.  I think I’d like to pass out a compliment first.  A friend, Derek Sivers, is a technology entrepreneur who sold his company – CDBaby.com – and made 22 million.  He went on to follow your investment advice to the letter.  He put it all in a charitable trust, rebalances his portfolio every year and has been doing it for about 6 years or so.  He says it works brilliantly and he wanted to thank you because you have effectively helped him finance manage his life.  That’s a huge compliment.   Derek then came up with a question, which is a problem that I face as well.  

A lot of your advice is very U.S. based and the good news for Derek was he did all of this in the U.S., but he’s now moved to Singapore and New Zealand, and his question to you, and my question as well is what sort of advice do you have for us?  We have two fundamental problems.  One is that we don’t have Vanguard so easily available. Two is that a lot of your portfolio ratings are rated towards the U.S.  How would your advice change for people living outside of the U.S.?

Bill:  Well obviously, you would want to own more of your home market and less of the U.S.  A good place to start might be a third of each of them:  a third of your home market, a third of the U.S, and a third of everything else in the world.  That wouldn’t be a bad way to do it.  I’m sure there are more efficient ways to do it, but there’s a fellow by the name of Andrew Hallam who actually has written a book for people who live in Australia, Canada, and Singapore, and maybe one or two other places as well.  I think the book is Millionaire Teacher; I could be wrong about that. It’s quite an engaging book.  (Note: The book is indeed “The Millionaire Teacher”)

And secondly, thank Derek for the kind words.  I actually get this fairly commonly although very rarely from people with millions and millions unless maybe its 22 million yen. And it’s part of being an author, how often people tell you that you’ve saved their financial lives.



Rohan:  I’m 24 now, and we obviously have a whole bevy of friends who are all just getting into this concept of investing and having a little bit of money.  Our parents’ generation’s advice is to go buy a house.   I’d like to understand your thesis on houses as investments, a little bit around your ‘multiply your rent by 168’ rationale.  

Bill:  A house is not an investment.  It’s a consumption item.  You have to live in a house.   You can rent, or you can own.  That’s essentially the financial decision.  You should never ever consider it part of your net worth because it’s something that you need to have.  It’s sort of like counting your PC as part of your net worth.  You need a PC.  Why should you include it in your net worth?

Now what you’re referring to is what I call the rule of 168, which is how to make a rental value and a purchase value equivalent.  Let’s say you’ve got an apartment that you’re renting for 1000 dollars a month.  What that tells you is that you shouldn’t pay more than 168,000 dollars for a condo that basically looks the same to you.  All that comes from the number 168 is simply 14 years’ worth of rent.  That is a normal price to rent ratio.  And so if you’re paying much more than 168 months’ rent for a residence, you’re probably paying too much.  If you can pay a lot less than that then you’re probably doing well.

For example I live in Portland and I can tell you a place in Portland that would rent for 1000 dollars a month is probably going to cost you at least 200 or 250,000 dollars.  That’s a bad ratio.  On the other hand if you were to go to Florida, or someplace out in the middle of Nevada, a place you would rent there for 1000 dollars you could probably pick up for 50,000 dollars.  Well that’s a good deal because that’s a price to rent ratio of 50 months, or 4 years.  So that’s how that number works.



Rohan:  A friend of mine had an interesting view on this.  He said, “I’m fairly geographically mobile, I have an option to buy a house at home which is what my parents want me to do.  I have an option to buy a home in Singapore, which is where I’m based, or I also have an option to invest in a house in Malaysia which seems to be coming up, which wants to attract foreign investors, and you don’t need to put in massive amounts to invest.”  How do I look at all of this?  Does this make sense?  Or am I just looking at this the wrong way?  Should I just be taking that money and putting it into an index fund, for example?

Bill:  Buying real estate and renting it out, as a business isn’t an investment, it’s a job.  If you enjoy fixing toilets and dealing with drug-addled tenants, it’s not a bad job.  However when you’re looking at whether to buy a place here or there, again use the price to rent ratio.  That’s not to say Singapore is going to be the next London.  It doesn’t appear to be happening, at least from what I understand.  You could do very well in real estate, or Malaysia might be the next Fort Lauderdale or Orlando which is not a good thing.  Obviously all else isn’t equal there, but price to rent is a good place to start.



Rohan:  Now that you wrote A Splendid Exchange, what was the motivation, and what were your biggest reflections or lessons from it? I had a lot of things going through my head as I finished that book, but it would be very interesting to see your view as you talk through all that history and put it all in one story.

Bill:  First of all, the story of how I came to write it, my motivation, was very straightforward.  I’d just finished The Birth of Plenty, and I got a phone call from a man by the name of Brando Skyhorse.   Brando is an acquisitions editor at Grove Atlantic press and he calls me up and says that they would like me to write a history of world trade.”  And I said – “I don’t know anything about it.  I’m not terribly interested in it, and either way you’ve got the wrong Bernstein.  You want Peter Bernstein. ” There was an awkward silence at the end of the line.

I went out from my dent into our family room where my wife was finishing her morning coffee and the New York Times crossword puzzle, and I told her what happened.  She put down the crossword puzzle, and she put down here coffee, and she looked at me and she said, “Do you know who Grove Atlantic Press is?”

I said, “Well not really.”

And she said “Did you know who Grove press is?”

I said, “That’s Darvis Lessie, Junior Rourke, going further back Henry Miller.”

And she said, “Right, and you’ve heard of the Atlantic monthly.”

And I said, “ Yeah I’ve heard of them too.”

She said, “That’s Grove Atlantic Press.  If you value your career as a non-fiction writer you will write whatever it is they want you to write.”

That’s how I came to write A Splendid Exchange though I wasn’t strongly motivated.  By the way they had talked to Peter Bernstein, and what Peter had said was, “I can’t do it because I’m writing history of the Erie Canal, but there’s this other Bernstein who might be interested.”

It was a fascinating project, but I didn’t know two things when I started the project.  One is that I didn’t know that Brando’s boss is a publishing genius and is able to identify superb viable subjects.  What he knew that I didn’t know was that because the history of world trade was soaked with sex, violence, luxury goods, and mass debt, it was going to be a hit. That was also what I quickly found out and became enchanted with as I wrote the book.  One of things you try to do as a non-fiction author is to find the most compelling narratives you can, and they were all over the place with this particular subject.  It was quite a pleasure.



Rohan:  Behind every successful man, there definitely is a woman.  

Bill:  I haven’t even mentioned to you the largest publishing asset that my wife brings to the table.  My standard procedure with every book that I read or write is to bring her a chapter and she’ll look at it and ask, “What in tarnation are you trying to say?”

I’ll tell her.  She’ll say, “Well then say it.  Here’s how you do it.”  Then I’ll give her a second draft and she’ll say, “It’s getting better but you still need to this, this, and this.”  Finally I’ll give her a third draft and she’ll say “Oh, alright I guess you can send it to your publisher now.  It’s okay.”  Without her I would be dead in the water.



Rohan:  You started as a doctor, you then started doing some financial writing, and now I see you’ve written a book on the history of communication.  Is this what you do now?  Is this the full time job?  Is this the career?  

Bill:  I have no full-time jobs at the moment.  I spend a lot of time managing money because we have a financial advisory service.  I spend a lot of time reading and writing, and hope to continue to do.  I spend a lot of time traveling, and I’m spending an increasing amount of time with my first grandchild.

Everything in moderation; you need a balance in your life.  That’s what I’m trying to do – balance my life at this point.



Rohan:  The last six years have been pretty dismal financially.  Every time we seem to come out of the recession we seem to lean back into it again.  What has your take been of the times?  What I’m struggling to see is something as sustained as this in financial history and I just wonder how long it will take for all of this to be cleaned up.  For example the Eurozone doesn’t seem to be getting any cleaner as the years progress.  What is your view on this?

Bill:  There are really two questions in there.  First, is there anything unusual, and what is unusual about this?  The answer is nothing.  Between 1966-1982 or so, the U.S. stock market had a zero real total return.  After inflation, the return was zero for 17 solid years.  There’s nothing unusual about the period of stagnation.

Now the other thing you learn from financial history that may be the most valuable is that the best fishing is done in the most troubled waters.  The times that you make the most money is when you buy stocks the cheapest.  Stocks don’t become very cheap without a really good reason.  You go back in financial history and just run the numbers and you ask yourself what were the best times to buy stock?  Well that was in July of 1932 when things looked not just awful, but apocalyptic.

1982 was a spectacularly good time to buy stocks.  March of 2009 was a pretty good time to buy stocks as well.  What did the world look like in 2009, and 1982, and 1932?  It looked like the world was about to end.  Any rational person would have said heuristically, this is not a good time to buy stocks.  I’m going to wait until the sky clears.  If you wait until the sky clears it’s too late.  The best time to buy stocks is when things look the worst.  If you’re telling me that Europe looks terrible, then I’m buying European stocks.



Rohan:  What do you do to stay productive?  You do a lot of things now and it seems like your days are pretty filled up.  I think taking care of your grandchild in it self would be a fairly busy job in addition to managing money and writing these books and reading.  Are there any deeds or habits that help you stay productive and energized?

Bill:  We have a toy in the United states; it’s a small straw toy called the Chinese finger puzzle.  It’s a little straw tube and if you pull on it too hard, it tightens up and so the trick is actually to push it together.  Well, literary creativity and financial creativity is just like that.  The less you do, the more creative you are.  Show me a person who works 70 or 80 hours a week and I’ll show you a person who’s never had an original thought in their life because you just don’t have the time to have them.

That was something I realized very early on in my career when I was a graduate student of the sciences.  The times that I was most productive were actually the times that I was working the least and I had the most free time.  Now it’s funny because people ask me when do you sleep?  That’s usually the first question that somebody asks me when they meet me for the first time because they see all these different areas that I’m active in.  If I work three, four, or five hours in a given day that’s a lot of hours; I’ve got to recover from that.  I will take four weeks a year to travel and not feel stressed when I come back.

In this day and age it really doesn’t matter where you are anymore.  You can be on top of the Himalayas and still get work done if you need to get the work done.  It really doesn’t matter.   I used to joke with people when they said what’s your goal in life?  I said that it’s to take a suitcase full of books to Provence for six weeks and call it work.  The funny thing is that now that I’ve gotten there, I don’t have to carry the books around with me anymore.  I’ve got a Kindle.

We were on a train several years ago in Scandinavia and I was just reading an article online on the train going from Copenhagen to Stockholm in reference to a subject that I was interested in. I went to JSTOR and was able to find a 30 year old academic article traveling across the Swedish countryside at 100 miles an hour.  It was quite a revelation to somebody of my age.  If you’re 59 years old it’s normal, but if you’re 65 years old it’s not normal.



Rohan:  I agree.  We did the Google switch in Asia when I was in university a few years ago.  I’ve seen a little bit of the old and I’ve seen now, and I still find it amazing.  I still remember listening to A Splendid Exchange as I was walking down the street in Singapore or traveling on a bus, and I thought it was so cool.  I have a private narration of the history of the financial world as I’m doing something else.  It felt really amazing; great time to be alive.  

What is an idea or thought that inspires you that you would like to share?

Bill:  That careers are grossly overrated.  If you really want to accomplish something, don’t put yourself into a deep, long rut.  It’s going to eat up decades and decades of your life.  You have to do whatever the heck it is you want to do.

The only other vaguely inspirational thing that I can tell people is that if you’re thinking of writing as a career it is really just a by-product, at least from my perspective.  What you’re really doing is you’re using your writing project to direct your reading in a productive, fascinating, and a very satisfying way.  I’ll typically read 50-100 thousand pages whenever I produce one of my long form non-fiction books.  And that’s the real reward, in learning a subject very deeply.

Thank you for a very insightful interview, Bill. Getting personal investing right is something so easily overlooked and misunderstood by people. We have certainly gained a better understanding after your books and interview.

Real Leaders Team