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What Has Time Taught Bill Bernstein? The Contrarian | John Rekenthaler

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.” 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 john.rekenthaler@morningstar.com Put another way, a powerful mind-set is at least as important for investing success as a powerful

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.”

Our Contrarian Approach I go against the grain to find overlooked funds that may be ready to rally.