Guest Poster: William Bernstein's Advice to the Young Physician
Editorial Note: Reading Bill Bernstein's 4 Pillars of Investing changed my financial life. I've since followed his writings and career and even met him at a Bogleheads Convention. He agreed to write a guest post for me once I got this blog up and running. Although some of it will be familiar to his past readers (he freely admits plagiarizing his own work) there are plenty of oldies but goodies here and some new gems as well. I now print it in its entirety free of commercial interruption:
Financial Advice to Young Physicians
Among financial professionals, physicians have a richly deserved reputation as miserable investors. The conventional explanations for this are that their practices are so demanding that they don’t have the time to do it properly, or that they’re too egotistical to take professional advice. For many, this is sadly true.
But all is not lost; learning how to invest properly doesn’t take an inordinate effort, and all but the most egotistical of surgical personalities can learn to suppress their overconfidence. Medical practice, as you well know, is a profoundly humbling experience to anyone with a breath of intellectual honesty; the best doctors soon come to the conclusion that the more they see, the less they know.
The same, not surprisingly, is true in finance. The main reason that physicians are rotten investors is that it never occurs to them that finance is a science, just like medicine. Day-to-day medical practice is profoundly scientific, informed by a vast amount of underlying research; nowadays almost no drug or surgical treatment is adopted without rigorous trials comparing it to other accepted treatments or placebo. In short, most physicians would not commence a treatment for so much as a cold without a good deal of experimental and statistical evidence in back of it.
The most important work is reported in prestigious peer-reviewed periodicals such as The New England Journal of Medicine and Lancet. The key term here is “peer reviewed.” Nothing appears in these high-level periodicals without being vetted first by the top experts in the field—requests for multiple extensive revisions are routine.
Unfortunately, when doctors put on their investing hats, they completely forget their scientific training. There is, in fact, a rich and informative scientific literature about what works and what doesn’t in finance; it is routinely ignored. Instead of depending on the Journal of Finance (the investing equivalent of The New England Journal of Medicine), they get their advice from USA Today or worse, from their stockbroker.
Of course, I’m only picking on my former colleagues for fun—in this regard doctors are no different from lawyers, retail clerks, or anyone else. What’s truly scandalous is that even most finance professionals are unaware of the scientific basis of investing.
What is certainly true, however, is that unless you spend some time to learn, if you will, the anatomy, physiology, pathology, and pharmacology of finance, you are a sitting duck for every stock broker and financial advisor who comes down the pike.
What to do? Nothing, absolutely nothing, until you acquire some financial expertise. Fortunately, it’s not that hard. You will have to do some reading. This will take several months; take your time, for the hours you spend acquiring this knowledge will make you more income, on a per hour basis, than even the most productive ophthalmologist, neurosurgeon, or cardiologist can produce in their respective special procedural heavens.
Those of you who are seeking investing enlightenment are not going to find much of it on the Web. I suggest you log off, power down your computer, and read some books. Take your time. The months you spend perusing this list will be well spent. I'd recommend reading at least the first four books listed before even thinking of getting your hands dirty with real investing.
1. The Millionaire Next Door, by Thomas Stanley and William Danko. This is not a book about investing, but something far more important: saving. If you have to live in a McMansion, drive a Porsche, and wear $2,000 suits, you are condemning not only yourself, but your children to poverty; if you cannot save a high percent of your income, it does not matter even if your name is Warren Buffett.
2. A Random Walk Down Wall Street, by Burton Malkiel, is an excellent investment primer. It explains the basics of stocks, bonds, and mutual funds, and will teach you the all-important efficient market concept.
3. Devil Take the Hindmost, by Edward Chancellor. You simply can't learn enough about market history, and Chancellor's story of boom and bust in the capital markets, beginning in the 17th century, is pure mind candy. In my more cynical moments, I often think that investing is an operation in which wealth is transferred from those who do not know market history to those who do.
4. Common Sense on Mutual Funds, by Jack Bogle. It provides as much detail as you could ever want about this important investment vehicle. Mr. Bogle is the founder and retired chairman of The Vanguard Group, and has been an important voice in the industry for decades. Beautifully written, opinionated, and highly recommended.
5. Global Investing, by Roger Ibbotson and Gary Brinson. This is a beautifully written volume on the history of investible assets. An informed investor cannot know enough about market history, and this is the best single source in this area. Want to know: what the returns for US stocks have been in each of the past 200 years? The price of gold for the past 500 years? Interest rates and inflation for the past 800 years? It’s all here. As implied by the title, the authors also provide an excellent perspective on the place of foreign assets in a diversified portfolio, and provide some worthwhile insights on portfolio theory and the efficiency of the marketplace.
6. Value Averaging, by Michael Edleson. An extremely useful how-to guide on deploying a lump sum of money among multiple assets. Finally back in print as a Wiley Classic Edition.
Once again, take your time—even a year or two if necessary—to read these books. The time will be well spent, and you will be, by the end of the reading list, more than well prepared to efficiently and expertly invest on your own.
Editor's Note: If you'd like to read more from Bernstein, consider his five excellent books below. He might also be willing to manage your money, but the $25 Million minimum will keep most physicians off his client list. However, a mere $25 will get you all the books below which just may, in the end, be worth hundreds of thousands of dollars to you as they were to me. His blog, although now discontinued, is also worthy of a few hours of your time.
Disclosure: I have no financial relationship with Dr. Bernstein. But if you buy anything from Amazon from the links on this page I'll get a small commission (at no additional cost to you.)