Dr. William Bernstein, a financial theorist and neurologist known for his influential works like The Intelligent Asset Allocator, shares his insights on investment strategies. He highlights why young investors should embrace the possibility of a bear market. The conversation delves into the psychological pitfalls of overconfidence in investing and assesses small-cap and value stocks. Bernstein also discusses the economic disparities exacerbated by the pandemic and draws intriguing parallels between his medical and financial careers.
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insights INSIGHT
Risk and Return Are Connected
Understanding the link between risk and return is crucial from the start. Higher returns generally come with higher risks you must be prepared to face.
insights INSIGHT
History Shows Stocks Lose Deeply
Market history teaches that stocks can lose half their value roughly once per generation. The best buying opportunities appear in the worst economic times when stocks are cheap.
insights INSIGHT
Why Young Investors Need Bears
Young investors benefit from long bear markets as they lower prices for buying shares. Experienced investors prefer good early returns to build cushions before downturns.
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This book provides a detailed approach to investing by emphasizing four essential pillars. The first pillar, investment theory, explains the relationship between risk and return and the importance of diversification. The second pillar, history, highlights the importance of understanding past market trends to make informed decisions. The third pillar, psychology, addresses the behavioral biases that can affect investment decisions. The fourth pillar, business, discusses the financial industry and how to navigate it effectively by minimizing costs and avoiding biased advice. Bernstein advocates for a long-term, buy-and-hold strategy using passively managed index funds and emphasizes the need to control costs and ignore most investment media[3][4][5].
In keeping with our recent tide of incredible guests, today’s one is no exception. Dr. William Bernstein, a financial theorist, advisor, and neurologist, joins us to share some of his incredible insights. As the author of several seminal books such as The Intelligent Asset Allocator and The Four Pillars of Investing, Dr. Bernstein has made his mark applying his medical evidence-based approach to investing. These works have had a particularly strong influence on Cameron when he made the transition from active mutual funds earlier in his career, so it was an incredible honour to have him on the show. In this episode, we dive into a range of topics. We kick off with the importance of understanding investment theories and market history along with why Dr. Bernstein believes young investors should cross their fingers and hope for a bear market. We then take a look at how overconfidence and ill-discipline affect investment decisions and how investors can test their risk appetite in real-time. From there, we turn our attention to small-cap and value stocks and Dr. Bernstein’s take on them and the role they should play in your portfolio. We round the show off by discussing the real economic issue that Dr. Bernstein thinks the pandemic is bringing to the fore in the US, the parallels he has seen between his medical and his financial advisory career, and some of his frustrations in communicating financial advice. Be sure to tune into this phenomenal episode.
Key Points From This Episode:
Learn more about today’s guest, Dr. William Bernstein, and his background. [0:01:06.0]
An overview of value averaging and how it’s different from dollar-cost averaging. [0:02:37.0]
Why Dr. Bernstein believes it’s so important for investors to understand investing theory. [0:05:14.0]
What it means to understand the several facets of market history. [0:06:28.0]
Insights into return sequence and why young investors should hope for bear markets. [0:08:11.0]
Why generational underperformance is arguably a bigger risk than volatility. [0:09:39.0]
Why people are so bad at evaluating their risk tolerance and how they should assess it. [0:11:54.0]
Bernstein’s take on whether young investors should be using leverage. [0:15:15.0]
Insights on premiums for small-cap and value stocks and the reason to not build an entire portfolio of them. [0:15:49.0]
Dollar-cost averaging vs value cost averaging: Dr. Bernstein’s position. [0:19:37.0]
Factors that influence the shift from an equity biased portfolio to a fixed-income one. [0:21:08.0]
How to reconcile the idea that stocks can be less risky than bonds over time. [0:23:58.0]
When Dr. Bernstein would make the rare recommendation of an annuity. [0:25:33.0]
The difference between financial systems and airfoils and electric circuits. [0:27:29.0]
Why Dr. Bernstein calls mean-variance optimizer an error maximizer. [0:29:28.0]
Bernstein’s opinions on gold and some of the problems he sees with it. [0:30:34.0]
What Dr. Bernstein is really worried about with the securities market in the COVID crisis. [0:31:49.0]
The similarities between neurology and financial advisory and what motivated Dr. Bernstein’s transition. [0:35:04.0]
The impact that the current crisis is likely to have on global trade. [0:38:01.0]
Find out what Dr. Bernstein thinks about the US Central Bank’s crisis response. [0:39:24.0]
The lessons that Dr. Bernstein has learned about communicating financial topics. [0:40:46.0]
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