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History's Glimpse of the Future

From the Silk Road to Wall Street, author William Bernstein finds that investors react to economic factors in similar ways.

Helen Modly, 06/05/2008

You might think that a presentation titled "Investing 501 with Bill Bernstein" would be a dry, graduate-level lecture full of financial calculus. You'd be wrong. In a casual Q&A format with Morningstar's John Rekenthaler at this month's Morningstar Conference, William Bernstein will discuss why the study of world history from a financial perspective should make investors, and their advisors, skeptical about most of what the investment industry believes.

Bernstein is the well-known author of The Intelligent Asset Allocator (McGraw-Hill, 2000), a mathematical treatise on modern portfolio theory, and The Four Pillars of Investing: Lessons for Building a Winning Portfolio (McGraw-Hill, 2002), an entertaining do-it-yourself manual for individual investors. But his session at this year's conference is not really about portfolio design or modern portfolio theory. It is his other two books that provide a clue to the insight he will be sharing with the audience. The Birth of Plenty: How the Prosperity of the Modern World Was Created (McGraw-Hill, 2004) explains the four conditions necessary for sustained economic progress and how these will shape the future of our global economy. A Splendid Exchange: How Trade Shaped the World from Prehistory to Today (Atlantic Monthly Press, 2008), which was published this spring, is a timeline of how trade and globalization have slowly evolved from the stone age to the vast riches of today. The book is a sweeping view of human history from a financial perspective.

I recently spoke with Bernstein about his appearance at the conference. Our conversation was full of historical anecdotes that explain why today's investment climate looks the way it does.

Helen Modly:  How will you relate the insights that you have developed from your studies to the activities of investment professionals?

Bill Bernstein: It is important for them to realize that knowing the math of investing is not enough. They need to know and understand the history behind the math. For example, 10 years ago, you and I could have been at a cocktail party and everyone in the room would have been discussing the latest dot-com IPO. If you wanted to know who in the room had been snookered by the bubble and who hadn't, you could have surveyed them to see who knew the major players in the last investment bubble. Those who could name a few of them would probably fare better than those who had no idea what the last investment bubble was.

HM: Do you think that an ignorance of financial history leads to overconfidence?

BB: Absolutely.

HM:  What do you hope advisors learn from your session?

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