Bill Bernstein on Why GameStop, Tesla, and Bitcoin Don't Reflect the 'Wisdom of Crowds'

In a recent conversation on The Long View podcast, we spoke to noted author and financial advisor William Bernstein. Bill has written a number of books on investing and financial history, his most recent being "The Delusion of Crowds," and is a frequently cited expert on asset allocation and personal finance topics.

In this excerpt of our conversation, we ask Bill whether, based on his research, the current market fits his definition of a "bubble" and whether GameStop, Tesla, and Bitcoin are examples of the wisdom of crowds, or something else entirely.

The complete podcast recording and transcript also cover a number of other topics, including where we are in the pandemic; the potential cost of free trading; where he sees value; whether inflation is a looming concern; when diversifying assets cease to diversify; the role of bonds in a portfolio; SPACs; social security; annuities; and more.

Benz: Let's switch over to discuss investing, starting with the current market environment. You just published a book on popular delusions. Does that describe this market in your opinion? Are we in a bubble?

Bernstein: Well, a year ago, I would have answered that in the negative. I just didn't see any of the usual diagnostic signs that one sees during a bubble, which is people thinking that they're going to be coming effortlessly rich, which they chatter about endlessly whenever you go to a party or you meet people casually on a social basis. We weren't seeing people quitting their jobs to day trade. You weren't getting a lot of anger or pushback when you express skepticism, and you weren't seeing extreme predictions. But we're starting to see all of those things now. And particularly, with Robinhood and GameStop and the other short squeezes that are going on, there's now a significant population of relatively young people who really believe that this is the path to effortless wealth, and they've already made it to easy street, and they're quite excited about it. And I have to admit that I missed this for a while because I don't hang around a lot with too many 30- to 40-year-old people aside from my kids, who are too smart to get involved in this sort of thing.

Ptak: You cite James Surowiecki's book, The Wisdom of Crowds, in your just-published book, and it lists three requirements for effective crowd wisdom. First is independent individual analysis. The second is diversity of individual experience and expertise. And third is an effective way for individuals to aggregate their opinions. So, what do you see when you apply those requirements to three stories that have captured headlines in recent months? I think you've referenced at least a few of them. One is GameStop, second is Tesla, and the third one being Bitcoin.

Bernstein: Well, you've got the third of those criteria, but you certainly don't have the first two. The Surowiecki book is a fabulous book. And I recommend it to just about everybody I meet. And the only quibble I have with it is it's mistitled. He is really not describing a crowd. When I think of the crowd, I think of going to a stadium and seeing people doing the wave or screaming all at once. What Surowiecki is describing is the opposite of the crowd, which is just what you described, which is well-informed observers who are making independent judgments. And that's hardly what's happening on the various Reddit forums and people who are using Robinhood--they all are basically going back, bouncing off each other in an echo chamber. And that's the opposite of Surowiecki described.