In this episode of Motley Fool Answers, host Alison Southwick and Motley Fool personal finance expert Robert Brokamp are joined by author William Bernstein to expose the roots of human irrationality and the cost of mass mania. Plus, Alison teaches us the poetry of "yogababble."
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This video was recorded on June 8, 2021.
Alison Southwick: This is Motley Fool Answers, I'm Alison Southwick, and I'm joined as always by Robert Brokamp, Personal Finance Expert here at The Motley Fool. Hello, Bro.
Robert Brokamp: Hello, Alison, how are you?
Southwick: I'm good, this week we are joined by William Bernstein. He is the author of The Delusions of Crowds: Why People Go Mad in Groups. Somehow, Bro is going to make it about money. All that and more, on this week's episode of Motley Fool Answers.
Brokamp: Alison, what's up?
Southwick: Well Bro, today we're going to talk about yogababble. It's a phrase coined by NYU marketing professor, Scott Galloway. If you're not familiar with him, he is brash, he is divisive and he is an entertaining guy, and yogababble is no different. Galloway defines yogababble as if my yoga instructor went into investor relations, or more simply, corporate BS, particularly as outlined in a company's purpose, mission, or vision statement. Yogababble is fluffy, blurry, audacious language that offers some vague overpromise that leaves you understanding even less about what the company actually does. Galloway's team decided to take a qualitative look at the level of BS, as he describes it, in companies' S-1s. An S-1 being that big ol' document that a company files with the SEC when they want to go public. They then check to see how that stock performed. Their theory being that yogababble was a way to distract investors from what could perhaps be lackluster quantitative figures, like ugly EBITDA, lousy revenue, or weak projections. Yogababble being a verbal misdirection of synergies, out-of-the-box thinking, new paradigms, and changing the world. As Galloway writes, "when firms are still searching for a viable business model, the temptation to go full yogababble gets stronger." Before I go into some of their examples, let me point out that this is not rigorous research. It's incredibly subjective, and just 100% fun.
Also, they did this research back in 2018, 2019, back when things were much more simple. Of the companies they looked at, the company that scored the highest with nine out of 10 on the yogababble index was Snapchat with, "We believe that reinventing the camera represents our greatest opportunity to improve the way that people live and communicate." Peloton with quote, "On the most basic level, Peloton sells happiness." The lowest on the yogababble index, with one out of 10, they included Zoom with quote, "To make video communications frictionless," and Tesla. Yes, Tesla, with their surprisingly straightforward S-1, with, "We design, manufacture, and sell high-performance fully electric vehicles and advanced electric vehicle powertrain components." Yeah, you sure do Tesla, so surprised by that one, and how just down to earth it was.
Now, here is where everything was so nice and tidy for the researchers, because the companies that they rated low on the yogababble, like Zoom, outperformed companies like Peloton who scored high on the yogababble. Then, companies that ranked middle on yoga ranked well in the middle on stock performance. But then of course, the pandemic hit, and here's where things get interesting because as you know, they did this research in our halcyon days of pre-COVID pandemonium. They only looked at the notoriously volatile times immediately after the IPO. Let's start with Zoom, one that scored low on yogababble with a mission to make video communications frictionless. Six months after the IPO, Zoom was up 122%, and now it's up 450% since its IPO, compared to the Nasdaq 70%-ish. OK, not bad. Middling Spotify, which came in at five out of 10 on the yogababble index, was up 9%, a year after their IPO, and is now up around 60%. That doesn't sound too bad, but it's not beating the Nasdaq Composite, which is closer to 100%, over the same time period. Finally, let's check in on the company whose mission is totally not vague at all, sell-happiness Peloton. Laughably, Galloway looked at its returns only one day after their IPO. Again, this is not rigorous science they were conducting here, when it was down 11%. Now, it's up 330% from their IPO, versus the S&P's 42%. Yogababble is fun, we get to roll our eyes at companies that sound like they've drunk their own Kool-Aid, but as far as the leading indicator or predictive science, it's so qualitative, it's very hard to measure. Then things like global pandemics happen that turn the whole world topsy-turvy, where a company that just wants to make happiness is actually a very attractive proposition. Before we go, I wanted to see if you two can match a few mission statements from their S-1. Are you ready? First up.
Brokamp: We'll see what happens here.
Southwick: "Our mission is to elevate the world's consciousness. We have built a worldwide platform that supports growth, shared experiences, and true success."
Brokamp: Something related to Canada, so I'm going to say Shopify.
Rick Engdahl: I'm going to say, some social media something.
Southwick: What if I tell you what their current mission is, it's to create environments where people and companies come together to do their best work.
Brokamp: WeWork.
Southwick: Yes, back when they went public, they had that first fluffy statement of, "We're elevating the world's consciousness." Now, if you go to their site though, it's a decidedly more straightforward language of "We create places where people work."
Brokamp: That's because the CEO and his wife are no longer in charge. His wife was some kind of new-age something-or-other.
Southwick: Next up, "Our mission is to make commerce better for everyone, and we believe we can help merchants of nearly all sizes and retail verticals realize their potential."
Brokamp: Square.
Engdahl: Shopify.
Southwick: It was Shopify, nice work. Next up, "To harness technology and social impact, to be the world's most loved insurance company."
Brokamp: Lemonade.
Southwick: Lemonade. Next up, "Our mission is to create a world where you could belong anywhere, and where people can live in a place instead of just traveling to it."
Brokamp: Airbnb maybe.
Engdahl: Airbnb.
Southwick: Yeah, Airbnb. Next up, "Our mission is to make people's working lives simpler, more pleasant, and more productive."
Brokamp: The Motley Fool.
Southwick: I'm going to pretend you didn't say that.
Engdahl: I don't know. That could be anywhere.
Southwick: It's Slack, and of course, then there is this final one, "Making the world smarter, happier, and richer."
Brokamp: That's The Motley Fool.
Southwick: Better get that right.
Engdahl: We've got two thumbs and a mission statement.
Southwick: Well, we're not going public anytime soon, so whether it's yogababble or not, it's ours. Hopefully, we are living up to that every day. That, Bro, is what's up.
[...]
Brokamp: He took a scientific approach to the challenge, reading the classic texts in peer-reviewed studies and eventually sharing what he learned online at efficientfrontier.com beginning in the mid 1990s. He eventually landed a book deal, publishing The Intelligent Asset Allocator in 2000, which he then followed up with by more than 10 additional books on investing and economic history. He eventually left medicine and formed Efficient Frontier Advisors, an investment advisory firm, and earlier this year he published his most recent work, The Delusions Of Crowds: Why People Go Mad in Groups. Bill Bernstein, welcome to Motley Fool Answers.
William Bernstein: Happy to be here, Bro.
Brokamp: Most of your books are about investing or the history of money in some form, but this one's a bit different. Only about a third of it is related to finance. A good bit of it is devoted, as one might expect to psychology, but a large portion covers historical religious events. What inspired you to write the book and what do money and religion have in common?
Bernstein: Well, they have a revolutionary past in common. The reason why I wrote the book is because of a shaggy-dog story. It goes back to the early 1990s, almost 30 years ago, when I read Charles Mackay's famous memoirs of Extraordinary Popular Delusions and the Madness of Crowds, which is relatively familiar to people in finance because it tells the story of the Dutch tulip-mania and also the two great bubbles in nearly 18th century in Paris and London. When I first read the book, I thought, "Gosh, this is interesting. All these people going crazy over stocks or tulips or whatever." But it's not terribly relevant, the markets back then were relatively sedate. Then three or four years later before my astonished eyes I saw exactly the same things that Mackay was describing, playing out in the capital markets, especially with tech stocks and it saved my bacon. That's not at all unusual because Mackay's book has been saving investors' bacon for at least the past 100 years, most famously Bernard Baruch read the book just before the 1907 stock market crash and he recognized the signs and the symptoms and he was so impressed by the book that he actually wrote the forward for a later edition of the book. I filed that away. Then about five or six years ago, like everybody else in the world, I was absolutely astonished at the ability of the Islamic state to attract people from around the world, to fight for its cause in one of the worst places in the world. A lot of the people came from prosperous Western countries, and I wondered how they managed that. It turned out that they did it by deploying an end times narrative or religious end times narrative. It's almost identical in many respects to the narrative believed by a lot of American Evangelicals. It's a belief system called premillennial dispensationalism and I thought, I've got to follow on to Mackay's book because a lot of Mackay's book was also about religious delusions and religious manias as well.
Brokamp: You often in previous interviews have provided a bit of a disclaimer so that if people are religiously sensitive or sensitive about their beliefs, particularly maybe Evangelicals, be prepared to maybe be somewhat poked a little bit in their beliefs.
Bernstein: Yeah, and by all means don't buy my book because [laughs] you will be offended, if you're an Evangelical Christian. In fact, you might as well turn off the podcast right now.
Brokamp: I should say that most of the world's great religions get your discerning eye, you do talk about Zionism. You do talk about, again, the Islamic state and Osama bin Laden, a lot of people. So your equal access discerner or something like that, I would say?
Bernstein: Yeah, occasionally, the last chapter has got Islam and I've been accused by few people of being an Islamophobe and I'd say, "Well, yes, I think that fundamentalist Islam is a risk to humanity and it's a scourge on humanity," and then I said, "So is fundamentalist Judaism, and so is fundamentalist Christianity as well." I'll leave it at that.
Brokamp: Got it. One of the more interesting observations you make in the book is that you basically say that humans are the apes that tell stories, imitate, and seek status. How has that helped us in the past and why maybe is it not so good these days?
Bernstein: Well, the easiest way to think about the most important thing you mentioned, which is our proclivity to imitate the people around us, which is obviously what's happening in the financial markets now. The question is, why did we evolve that way? The easiest way to think about it is to use this paradigm, which is to think about the expansion of mankind into the new world across the Bering Strait at the end of the late Pleistocene, 10,000-15,000 years ago. Within several thousand years, humankind's spread from the High Arctic through the Great Plains and into South America and into the Amazon and all the way down to the tip of Tierra del Fuego. In order to do that, we had to learn how to build kayaks and to hunt bison on the Great Plains and to construct poison blow guns for use in the Amazon. All those things are impossible to do, unless you've seen them done before. We find the one person who managed to figure out how to do it or more accurately the culture that managed to accomplish it over many generations, and then you imitate the people that are best at doing it. That's where status comes in, because you just don't pick up and learn from anybody, you actually pick the people who are highest status in your society to learn from, so that's where the status part of it comes in. Then finally, our proclivity to follow compelling narratives over facts is simply because that's how the brain works. When two Pleistocene hunters got together and decided to hunt big game, they didn't issue each other mathematical coordinates. They said, "You go right, I'll go left and we'll spear the beast from both sides," they told the narrative.
Brokamp: You pointed out that this is all very important for you, no one's born learning how to build a kayak, for example, you have to learn that from people who've already done it and passed on that knowledge. Part of that is that we have to be willing to believe other people. You quote a couple of psychologists, Boyd and Richerson saying, "To get the benefits of social learning, humans have to be credulous." We're built to believe in other people.
Bernstein: Yeah, to use their almost precise words. We're getting blow guns and kayaks on the cheap. But it has a price, which is that we tend to imitate people around us. In the modern world, that's particularly costly and nowhere is it more costly than in finance.
Brokamp: You talked about the power of narrative, and that's good in some ways, it's been a way that for generations, people have passed along knowledge and history, but also people can be suckers for a good story. How is that failing us these days?
Bernstein: Well, the best example I can think about, I tried to leave Donald Trump out of the book and when I did mention him, I wanted to mention it somewhat favorably. I didn't tick off the other half of my audience. [laughs] The story I tell is how in late 2015, during one of the early Republican primary debates, he was standing by as Ben Carson got asked about vaccination. Ben Carson, who is a renowned neurosurgeon, gave the correct answer, which was that it didn't cause autism. That they were perfectly safe and he had his kids immunized for the usual childhood diseases. Donald Trump interrupted him and said, "I have an employee who had a daughter, a beautiful daughter, who got vaccinated and soon thereafter developed autism. I tell you it's an epidemic that is sweeping the country." Now, of course, that's an entirely fallacious, if not probably fabricated line of reasoning. But everybody who looked at that debate scored it in his favor. It's just a perfect example of a good story trumping the facts, so to speak.
Brokamp: So to speak, pun intended. But despite the potential dangers of people falling for a good story, you do tell a lot of good tales in your book about some historical mania. So I thought it'd be helpful if you briefly summarize a few of them. We'll discuss two financial ones, one religious, and perhaps you could share your takeaways. Let's start with the railroad bubbles in England in the first half of the 1800s. You set it up for readers by painting a picture of what life was like back then. So before the railroads or the iron roads as some people call them, nothing moved faster than the speed of a horse. It took weeks to transport goods from the North to the South and the other way around. In fact, it was sometimes cheaper to export goods to other countries like Portugal by boat rather than sell them within the country. But then around 1800 came the invention of the steam-powered train, as you wrote, "The new rail technology transfixed the world." Pick up the story from there.
Bernstein: Well, you can imagine how revolutionary it was. Land transport was so dangerous and so slow and so inconvenient that if you wanted to go, say from London to Newcastle, you didn't go by land. You went by boat. If you wanted to go to Italy, you certainly didn't travel over land through Europe. You took a very dangerous journey over the North Sea and through The Pillars of Hercules and to the Mediterranean. If you were lucky, you got there in one piece. All of a sudden, people were able to travel at 30, 40, 50, 60 miles an hour from London to Edinburgh within one day. It absolutely changed the way that we live. If you think that the internet was revolutionary, the internet had nothing on the invention of the railroad. So it was very compelling new technology that transfixed people and of course, people wanted to invest in it. People got very excited. The analogous situation was the building of the fiber networks back 20 and 30 years ago. It was very easy to sell a railroad IPO, and there was a man by the name of George Hudson, who basically built a large portion of modern England's railroad network. He was the Elon Musk of his era. He was a capitalist hero. Everything he said got quoted. He was held up to popular acclaim. Of course, what always happens in that situation is that the first movers are generally not the ones who make the profits, because what happens is competing products come out and the prices of the services fall, technology advances and makes the initial technologies relatively obsolete. So invariably, these schemes fail. That's exactly what happened to George Hudson. George Hudson eventually went bankrupt and he took a lot of his shareholders with him.
Brokamp: You mentioned that a lot of the manias are characterized by what you say are the four P's: promoter, people, press, and politicians. The promoter was Hudson. He also had the politician part because eventually bought himself a seat in the House of Commons. Tell us a little bit about the people and the press, and by people do you mean, basically, the people who fall for these manias?
Bernstein: Yeah. Well, as someone who's a retired physician, I tend to think of the medical model of mania. So you start with the underlying pathophysiology, the physics and the chemistry that underlie it. For a mania, it's very simple. It's low interest rates. You always see lower interest rates because just like today, you can't get anything on safe security on a CD or a treasury. People are drawn to higher yielding and supposedly higher returning assets. Then you need an exciting new technology, which we've already mentioned. The next thing you think about is, what is the anatomy? Where in society is it taking place? The most compelling characters are the promoters. These tend to be very charismatic people. We live in a capitalistic society where people are judged by their wealth and their financial success so they become the heroes of the country at least until they slip and fall, which almost invariably happens for a number of reasons. And then they need suckers. They need people to buy into it. So these are the people who buy the railroad companies, buy the internet stocks, buy the Bitcoin, and who get told the story and then finally, of course, you've got the press and the politicians. The press writes breathless stories about the new technologies and the politicians played a much more important role in the past, as you already explained about Hudson, now securities laws prevent them from doing so. The role that the politicians play in the modern era is just more facilitatory. They don't regulate. They tend to lay off the regulation. They don't regulate the markets as well as they should, and so the markets tend to go off the rails.
Brokamp: There are a couple of other aspects that made this particularly harmful for the average person. One was, it was basically a form of leverage. When you bought the security, you didn't pay it all upfront, you paid a portion and then you were subject to calls of capital down the road. It turns out Hudson was doing something that was not illegal back then, at least until later in the 1840s. That was basically, he was paying dividends with new capital, what we would now call a Ponzi scheme, although this is a good 80 years before Charles Ponzi pulled his shenanigans in Boston.
Bernstein: Exactly. So it's just a form of leverage. If you can buy security by only paying 10% or 15% down, which was the way things worked both in London and in Paris during the 1720 bubble as well as during the railroad bubble, then if the price of your stock falls by 10% or 15%, you are wiped out. That's been transmogrified in the modern era, of course, into margin, which played an enormous role during the 1929 crash. Back in the day, you could margin up to 90% of your purchases. You just need to put 10% down and you borrow the rest from the bank or from the broker's loan. That's been cut down to about 50% now. But it is now possible, of course, as we both know, to purchase cryptocurrencies on close to 99% leverage.
Brokamp: One final note about this episode before we move on to another one is, you mentioned Charles Mackay and his book that came out in 1841. You would think he would have been right on top of this as a bubble. He was writing then, he was an editor. But actually, he didn't recognize it as a bubble at the time, if at any point, afterwards.
Bernstein: At the time, he was the editor of the Glasgow Argus, which was a big newspaper in Scotland. What he did was he published leaders from other newspapers. He basically presented both sides of the arguments. There were people who were skeptical, but there were also enthusiasts. He came down on the side of the enthusiasts. He said, "Yes, this may look like a bubble, but this is a revolutionary technology that can't be ignored, which of course, comes generations before the famous Templeton comment that the four most expensive words in the English language are, "this time it's different."
Brokamp: All right. So let's move on to a second episode here. One of the principles you've discussed in the book is, bad is more compelling than good. It brings us to what is now known as the great disappointment and a seemingly unassuming man from New York named William Miller. Tell us about him and how he convinced tens of thousands of people that the world was going to end in the mid 1800s.
Bernstein: Well, Miller was an interesting guy who started out life as, we would call him today an atheist who is agnostic, back in the day, he was called a deist, which is a slightly different but still rather skeptical belief system. He undergoes a transformative experience during the war of 1812, the Battle of Plattsburgh, which was this unbelievably bloody battle in which a small force of largely regular American troops defeated a much larger force of battle-hardened British troops. He thought that the only way to explain it was if God was on his side. So he began a detailed study of the Bible and came to the conclusion that the world was going to end sometime in 1843, and when it didn't end in 1843, it got pushed back to 1844. The bad is stronger than good is just a perfect example of what's happening now, which is why fake news travels around the world faster than real news. Because fake news is generally more compelling and more lurid. Well, the most lurid story that you can concoct has to do with the world ending. That's what really gets people's attention. That's what Miller was able to do. What happens is that through a rather complex series of events, he and his followers eventually settle on the date of October 22, 1844.
You had probably several hundred people in the United States waiting on that day to ascend to heaven in what we would now call the Rapture. Of course it didn't happen and it was the great disappointment. People gave away all their money to their friends because they didn't think it was going to do them any good. There were stories of pulpits being covered with currency because people were convinced they weren't going to need it. Of course, these people got very depressed when it didn't happen. Now what's interesting is what happened to the sect after its narrative got disconfirmed. What happened is that most of the followers fell away, a lot of them became today's Seventh Day Adventists, which is a very peaceful vegetarian sect, but a few of them doubled down. A few of the members of Miller's group doubled down and became quite fanatical. Of course, we saw almost exactly the same thing happen with QAnon which got disconfirmed at the stroke of noon on January 20. Most QAnon followers realized they've been had, but a very small number of them are doubling down and coming up with alternative narratives. I think history tells us that this group of disappointed doubling down followers have the potential for being very dangerous.
Brokamp: Yeah. When you talk about the Millerites, it's not just some obscure religious group that no longer has any impact on the future. You can draw a line from the Millerites all the way down to David Koresh in the Branch Davidians.
Bernstein: Yeah. Because the Branch Davidians are a branch of the Davidians which was itself the sect that branched off from the Seventh Day Adventist. You go from Millerism to the Seventh Day Adventist, to the Davidians, and then finally, the Branch Davidians, which gets taken over by this charismatic young man named Vernon Howell, who could spout the scripture like nobody's business and absolutely mesmerized people. He was convinced that the world was going to end fairly quickly. With the assistance of federal law enforcement officials who have no idea what they were doing which led to a real tragedy. The story doesn't even end there because in 1993 when the Branch Davidian complex went up in flames at the hands of the FBI, one of the observers, one of the eyewitnesses was a man by the name Timothy McVeigh, he was giving out gun rights literature. He vowed revenge, which he got exactly two years later to the day of the conflagration in Oklahoma City, killing even more people.
Brokamp: Yes, very tragic. One of the psychological principles that you brought up in this tale, and you waved them throughout the book, is confirmation bias. Basically, what we tend to do as people is looking for evidence that validates what we already believe in but what we should be doing is looking for evidence that contradicts it.
Bernstein: Yeah. In fact, when you talk to an experimental psychologist, what is confirmation bias? What they'll tell you is it's not so much consciously seeking out an opinion that agrees with your point of view, but it's actually much more aggressively unconsciously suppressing alternative sources. It's the liberal who doesn't read National Review. It's the conservative who doesn't read The New York Times. That's really what we're talking about.
Brokamp: All right, let's move on to the third episode from your book that I think is worth highlighting and it's more recent. It's the dot-com bubble, and a company that you don't hear so much about these days. But in many ways, it was the epicenter of the boom-and-bust. That company was a firm called Global Crossing. It was formed by Garry Winnick, a former bond salesman and protege of Michael Milken, the so-called junk bond king who served some time in prison. In your book, you explain how the dotcom boom and bust exemplified the four conditions of a bubble as laid out by economist Hyman Minsky. Those four are technological and financial displacement, credit loosening, amnesia, and the abandonment of time honored valuation principles.
Bernstein: Those last two aren't Minsky's conscious criteria, but they're implicit in his theory. His theory doesn't work unless you've got those two things. I am sure he realized that, he just never wrote about them in any great detail. The interesting thing about Global Crossing was it was the child of a bond salesman by the name of Garry Winnick. The joke about Garry Winnick was that his main expertise in communications technology was the ability to make a cold call. But Winnick it was a real visionary because he saw the need for an exponentially increased amount of submarine cable, of submarine fiber, and he built it out, something on the order of at least 15% or 20% of the submarine cable today is cabled with Winnick, fibered with Winnick originally built out. He was a real benefactor of humanity.
The ability to have, for all I know, the call that we're doing right now very likely is being transmitted over a fiber that Winnick constructed. Unfortunately, he wasn't good to his investors. Global Crossing got bought out for pennies on the dollar. What I'd like to say is that technology investors are capitalism's philanthropists. They fund these marvelous technologies that benefit all of us at great cost to themselves. This may also be true of Bitcoin in the long run as well. The blockchain technology may be of real benefit to the financial system. But I doubt if any of the people that are investing in cryptocurrency or even in what they see as the block-chain infrastructure are going to benefit. They're probably going to have their heads handed to them simply because it's such a sexy technology that's attracting way too much capital.
Brokamp: At the other points in your book, you point out that another sign of a mania is that people who have a contrary opinion, who think like, "You know what, maybe you-all should come down," they get attacked. I know you've expressed your opinion about Bitcoin and I can only just imagine what e-mails you get from the Bitcoin supporters.
Bernstein: I don't get any e-mails from them. Occasionally, what I see is a lot of vituperation on discussion boards, but that's fine. The only problem with that is my publisher won't know who to send the chocolates to. But that brings up the point, which is, I talked about the medical model of bubbles. We talked about pathophysiology, the Minsky criteria, the anatomy which is the four P's; the promoters, the public, the politicians and the press. But then there's the diagnostics. It's what you see at the bedside, the signs and symptoms at the bedside. You see four things. The first thing you see is you see the object of the speculation being everyday conversation. You can't get into an Uber taxi these days without talking to the driver about their cryptocurrency investments. The second thing is when people with good, solid jobs quit them to trade and all of a sudden become experts. They become investing experts even though they may not know the difference between a debenture and their derriere. The third thing is you get not just disagreement, but you get genuine anger. The reason for the genuine anger is very simple, people don't like being told they're not going to be able to get effortlessly rich. Then the final thing you see are extreme predictions. You see even some well-known mutual fund managers talking about Bitcoin making it to $1 million. It's possible that that fund manager may be right. But if I had to bet one way or the other, I would bet against that gender undefined fund manager.
Brokamp: Just a couple of more topics on the book and then we'll move into just some basic investing questions. One topic you cover in the book is the risk of basically maybe someone who's psychopathic getting access to a nuclear weapon. In an interview you did on another podcast, you said that you are even more concerned about that than global warming. As a society, do you think we're not taking that risk seriously enough?
Bernstein: Yes, it is a classic effect of recency. We haven't had the bajabbers scared out of us with a nuclear event for over 50 years whereas global warming is scaring everyone in the face these days. If I were faced with Hobson's choice of taking out of my grandchildren's future either the certainty of global warming or the 10% chance of a nuclear catastrophe or accident, which we've come within a hair's breath of several times in the past half century, I would pick taking nuclear holocaust or 10% chance of a nuclear exchange off the table, which I think is an underestimate by the way when you look at the history of the subject. I would rather deal with the certainty of global warming.
Brokamp: That's interesting. Warren Buffett also believes this and has put money into some initiatives in that, but even he doesn't really talk about it as much as he used to. It does seem to be this thing that has faded into the past, even though it's obviously still a risk.
Bernstein: I tried to get in touch before the book was published with Daniel Ellsberg who, of course, is one of the great experts on the subject. I didn't get in contact with him until well after the book was published, but I was gratified to find that he agrees with my assessment.
Brokamp: Interesting, and of course scary.
Bernstein: Yeah.
Brokamp: One final question related to the book. It's just general, and that is, is there anything people can do to guard against falling for a delusion, a scam, BS because you do talk about anatomy of the brain in the book? Are we just hard-wired to believe this stuff and we're collectively doomed?
Bernstein: The important thing is to at least think about the first two psychological proclivities we have, which is our ability to imitate. When everybody else believes that they really get effortlessly rich or a lot of people believe that they're going to get effortlessly rich and people are talking about it all the time with regards to a particular investment, that's a danger sign right there. Ask yourself, by imitating those people in mind, taking my cues from those people, that's the first thing. Then the second thing is to think about the Donald Trump primary debate story, which is am I listening to data or am I listening to a narrative? In finance, math can be very difficult. Doing discounted cash flow computation is not the easiest thing in the world and you may not have access to adequate data. So ask yourself, am I doing the proper quantitative analysis or am I listening to a story. That's the most important thing. Then the last thing I'm supposed to worry about is human proclivity towards overconfidence. Do I actually know less than I think I know? That is particularly a risk to the male of the species in question too. One of my female medical colleagues was fond of pointing out that testosterone does wonderful things for muscle mass, but it's not so great for judgment.
Brokamp: I have to say I probably agree with that one. Let's move to the investing questions. Given our discussion of manias and delusions and bubbles, where do you see that happening today? Obviously, you've mentioned Bitcoin. What about the stock market these days?
Bernstein: The obvious ones are cryptocurrencies, and of course, meme stocks as well. You see a lot of uninformed players getting hip deep into those fields. The question that you're asking is, do I worry about a mania in the stock market? I think I have to say I do not see the degree of mania surrounding the overall broad stock market that I saw in the late '90s. People really believed back in late '90s that all you had to do was invest in the Vanguard Index Trust 500 and you are going to make 12% a year and be fabulously rich by the time that you retire. I don't know too many people who believe that now. If I worry about anything in the stock market, it's just current valuations though. Trailing P/E is 40. Even if you normalize them up to pre-pandemic levels, you're still looking at a P/E of 30 or a show P/E a [...] of about 37. That's 99th percentile. I worry about that a great deal. The other thing that I worry about is interest rates. I worry about that from two points of view. No. 1 is that the expected real return of bonds now is something like minus one or 2%. If you get a typical equity risk premium on top of that, you're looking at a real return on equities, if you're very lucky, of two to 3% over the long term. That's better than investing in bonds. But you combine that with normal market volatility and you've got a very rough ride ahead. Now I hesitate to say that over the next 10 years, anything can happen. Stock returns could be 15% or 20% over the next 10 years. They could be minus 10% annualized as well. Both of those fit the outer range of probability. But over the next 30 years, I'm reasonably sure that they're going to be a lot lower than they were in the past 30 years.
Brokamp: Some types look more attractive than others, and specifically, things like value stocks and international stocks, which have underperformed larger growth U.S. stocks. When you talk about valuation, they seem cheaper. Is it reasonable to expect that they could have slightly higher returns than maybe the overall market?
Bernstein: I certainly hope so because that's the bet that I'm making. I think the value spread and valuation between value stocks and growth stocks is pretty near a historical high, certainly was last October. I think there's still a long way to go to narrow that spread. International stocks, particularly emerging markets stocks are also more reasonably priced than U.S. stocks. Now, I caution that it's very dangerous to extrapolate that into major portfolio decisions.
Brokamp: The problem, of course, with people hearing this were like, "Yes, U.S. stocks are overpriced, but what am I supposed to do? Invest in cash? Invested in bonds? If I am a retiree, should I invest in a single premium, income annuity? What are the best options?"
Bernstein: Well, the best option in that regard is to be philosophical and to look at the long term, which is if you've held a balanced portfolio over the past 10, 20, 30 years, you've done spectacularly well and you have a much larger portfolio in the sense than you deserve to have. So the counterfactual is a world that has historical treasury returns, treasury bond returns of 5%, bill returns of 3%, stock selling at an 18 or 15 PA. If we had that world, you'd have a much smaller portfolio right now. So you have a choice between having a great, big portfolio with a crappy expected return or a crappy yield or between having a much smaller portfolio with a much bigger yield. Which of those you prefer really depends upon who you are. If you are a geezer like me, you'd much rather have a great big portfolio with a small expected return. But if you're a younger person, you probably want the opposite. You probably want a small portfolio that's been hammered with a big expected return.
Brokamp: Since you touched on your age, we won't talk about your age, but you are definitely of an age in which many people are retired, do you consider yourself retired? Do you plan to retire? Do you think retirement is good for people?
Bernstein: Well, I'm retired as much as I want to be. I think you need meaning in your life. Different people derive from different activities in their life. You don't have to be still running a business or writing books, you do what gives you meaning. So if volunteering for other people gives you meaning, if reading stories to your grandkids gives you meaning, giving your children some respite from child care gives it meaning, then by all means doing that. I think the real problem comes with people who save for retirement, especially people in the fire communities who want to check out of the game at age 39. They really haven't thought carefully about what they're going to do for the next 50 years of their life, because that existence does require meaning. You're going to get very disillusioned very quickly, if you haven't thought about that aspect of it. So the things that give me meaning are writing books, running a small business, traveling as much as I can stand, and reading stories to my grandchildren over Zoom.
Brokamp: Although this has been fascinating, for people who want to learn more, of course, they should go out and pick up a copy of your latest book, The Delusions of Crowds: Why People Go Mad in Groups. If they want to learn more about investing in asset allocation, which of your books would you recommend that they start with?
Bernstein: The Investor's Manifesto. If they're young and they really want to get going, the book that I will recommend is a smaller pamph that I wrote, called If You Can. The major advantage of that particular publication is that it is free and will get you started. Just put my name, and "if you can" into a search engine, it'll pop right up.
Brokamp: Excellent, Bill. Thank you so much for joining us.
Bernstein: My pleasure.
Southwick: As always, The Motley Fool may have recommendations for or against the stocks we talked about, don't buy and sell stocks based solely on what you've heard here or their yogababble? Well, that's the show. It's edited babblingly by Rick Engdahl. Our e-mail is [email protected]. For Robert Brokamp, I'm Alison Southwick, stay Foolish, everybody!
