Top critical review
astonishingly incompetent work
on June 25, 2002
William Bernstein is the kind of man who, as Paul Krugman put it, would rather spend a year hunting down a fact than a day mastering a theory. His book is packed with math but devoid of intellectual content.
Bernstein's approach rests largely on his insistence that there is no way to successfully and systematically pick stocks and obtain a better return than the market; stock movements are truly random, in both the long and short term. His justification for this claim is almost nonexistent. Only once does he, briefly, present a theoretical argument: as soon as a mutual fund manager tries to buy a stock he or she has identified as a superior investment, the buying will push the price of the stock up so that it is no longer a superior investment. That's it; the entire book rests on that claim. Bernstein does not explain where to place the threshold: why, say, a $1 billion fund will be afflicted, as opposed to a $100 billion fund. In fact, his claim is demonstrably false, as index funds are huge and have (as he continously points out) outperformed most active managers.
There are many active managers who have beaten the market over an extended time. Except for four, Bernstein simply ignores them. He deals with Robert Sanborn's record by noting that he did spectacularly in the early 90's, and poorly in the late 90's. He then points out that Sanborn's assets increased during the 90's, and claims this as proof that asset bloat thwarts even skilled managers. This is patently ridiculous. Simply noting a correlation does not show that asset bloat affected the returns. The true explanation is that the market went bonkers in the late 90's, and Sanborn, being a superior manager, did not throw away money on tech stocks; instead he bought sound businesses, which the market ignored until after the bubble burst. It is astonishing to see Bernstein, who is a doctor, think that a correlation among a few data points constitutes proof (think of drug studies).
Bernstein has three excuses for Warren Buffett's superior performance, and they're pretty pathetic. First, he claims that because Berkshire's stock price sometimes drops, it is not a risk-free investment. True, but so what? Second, he claims that Buffett's performance has slowed in recent years, evidence of asset bloat. Aside from the problem of proving causality, this has hardly been a problem for long-term investors, and it is due not to asset bloat but to identifiable mistakes Buffett made. (I, for one, identified several in advance.) Third, Bernstein claims that Buffett is not a money manager, but a skilled businessman who becomes an active part of the companies he acquires. This is a blatant lie: Buffett has stated frequently that he does not interfere with the managements of his subsidiaries; in fact, he refuses to acquire any company unless the management will stay in place, since he says he would he have no idea how to run it.
Bernstein has a habit of lying. He claims that Peter Lynch's Magellan fund was not a mutual fund, but a private investment vehicle, before 1981, and so Lynch's record from 1977 to 1981 doesn't count. He makes the absurd claim that fund prospecti report the management fees, but not the operating expenses.
In denying that superior performance exists, Bernstein nowhere ackowledges the arguments made in favor of particular approaches (e.g. value investing), let alone refutes them. He processes irrelevant fund statistics endlessly, but does not look at the theories or results of legions of superior investors (Robert Olstein, Bill Nygren, Clyde MacGregor); even with Sanborn, Buffett, and Lynch, Bernstein never mentions or engages the active managers' arguments.
William Bernstein has no patience with ideas, and seems clueless as to how little he knows, as do his fans. He is clearly trying to play in the big leagues with only minor league talent.