10
In
2000
, Bill Bernstein published his first book,
The
Intelligent Asset Allocator.
It yanked away the punch
bowl from the New Era’s party. While other invest-
ment publications (most notably, the best-seller
Dow
36
,
000
) advocated euphoria and heavy doses of then-
popular growth stocks,
The Intelligent Asset Allocator
preached the unfashionable virtues of diversification,
caution, and contrarianism. Among its recommenda-
tions were
REIT
s and gold stocks. It was, in short, a
hopeless cause—the rare investment tome that sold
what would succeed, rather than what had already
thrived. Obscurity beckoned.
Then, however, the
2000
–
02
tech-stock crash made
Bernstein a prophet. Over the past decade, it has
been widely read by both do-it-yourself investors and
financial professionals.
Bernstein has published a sequel—
Rational Expecta-
tions: Asset Allocation for Investing Adults
. Much of
the material—the basics of Modern Portfolio Theory,
asset allocation, and the efficient-market hypoth-
esis—is familiar, although freshly presented. The
changes interested me most, however.
The biggest difference, perhaps, is that Bernstein has
become much warier of investment science. Com-
plicated risk measures are rarely as instructive as the
common standard-deviation statistic, he writes,
and thinking of risk in purely verbal terms as being
“bad returns in bad times” might be better still.
He is even less fond of quantitative asset-allocation
schemes. Memorably, Bernstein wrote that rather
than place return, risk, and correlation estimates into
a mean-variance optimizer and then following the
program’s recommendations, readers should “stuff
half [their] money in a mattress and lend the other
half to [a] drug-addled nephew.”
But that was back in the day. As with many serious
self-taught investors, Bernstein has a quantitative
background (doctorate in chemistry, M.D.) and was
initially attracted to investing because it had numbers.
The field looked suitable for a man of his talents. As
many other engineers and scientists have discovered,
succeeding at investments isn’t entirely the same as
succeeding at science. Having a good feel for numbers
is a necessary condition for investing well, but it is
not sufficient.
Bernstein writes, “As Warren Buffett famously
observed, investing is not a game in which the person
with an
IQ
of
160
beats the person with an
IQ
of
130
. Rather, it’s a game best played by those with a
broad set of skills that are rich not only in quantita-
tive ability but also in deep historical knowledge, all
deployed with Asperger’s-like emotional detachment.”
In fact, continues Bernstein, being extremely bright
and technically accomplished can actually be detri-
mental to investment performance. The geniuses at
Long-Term Capital Management, for example, had
rather too much faith in their ability to outsmart the
marketplace and rather too little recognition of the
possibility that they might be wrong. Bernstein sus-
pects that many of his readers may fit a similar
profile and pleads with them to “fill in what may be
the shallow areas ... a working knowledge of finan-
cial history and a healthy dollop of self-awareness
about [their] discipline under fire.”
Put another way, a powerful mind-set is at least as
important for investing success as a powerful
mind. Most people, however, are not wired that way.
In
Rational Expectations
, Bernstein painstakingly
explains what was mostly implicit in his first book:
Emotions destroy investment performance. Some-
how, some way, investors must suppress them. The
suppression might come from the blessing of nature;
from ongoing investment education; through shielding
mechanisms such as holding a blind trust; or, most
commonly, by cutting back on stocks and holding a
lower-volatility asset allocation. One way or another,
though, it needs to happen.
œ
Contact John Rekenthaler at
What Has Time Taught Bill Bernstein?
The Contrarian
|
John Rekenthaler
Our Contrarian Approach
I go against the grain to find
overlooked funds that may be
ready to rally.
