It’s not often that you read a book by mistake. While browsing the Kindle store, I thought I’d stumbled upon a new book by Peter L. Bernstein. Some time ago, I had really enjoyed his book, Against The Gods; the remarkable story of risk. I was initially confused and then realized I was instead looking at William J. Bernstein's book Deep Risk: How History Informs Portfolio Design. Interesting title.

I’m glad I went ahead with the purchase since Deep Risk turned out to be an interesting read, with plenty practical and straight-shooting advice. For those who are hardcore Peter L. Bernstein fans, be forewarned that this book is a different kettle of fish.

 Surprisingly, the author of Deep Risk is a retired neurologist. William Bernstein, Ph.D., M.D., lives in Oregon and is currently a co-principal at Efficient Frontier Advisors, as asset management company. Like the other renowned Bernstein, he’s written several best-selling books on history and finance.
The author divides risk into two categories: Shallow Risk and Deep Risk. I happen to think this dichotomy over-simplifies things, yet I’ll concede that risk is a terribly challenging subject matter.  

Bernstein describes shallow risk as “A loss of real capital that recovers relatively quickly, say within several years.”And he defines deep risk as “A permanent loss of real capital.”

He gives advice on how to navigate shallow risk with patience and discipline. The author then explores deep risk and possible threats to the capital you’ve built over decades. He discusses measures to protect against risks that can annihilate it.

In entertaining fashion, Bernstein compares the deep risk categories to the four horsemen of the Apocalypse, calling them Inflation, Deflation, Confiscation and Devastation. The author identifies assets that can help to mitigate each category of risk and using historic data and common sense, he assigns frequencies to their likelihood. I liked the fact that Bernstein delineated and detailed both impractical and practical solutions, although I would have liked to have more discussion and solutions when it came to “Devastation”. Falling in line with common opinion, the author equates it to Nuclear War and says in this instance, capital is the least of your concerns.

Data underlies all his recommendations and he holds that bonds don’t protect against deep risk. However, he mentions TIPS. Bernstein says you can be confident if your equity portfolio has a value bent, is globally diversified and includes some gold and commodity producers. In a way, I was amused because my own portfolio is exactly that. So I came away without strategies for change but with reassurance. 

Deep Risk is a good, easy read and I recommend it. While there are more theoretical books such as The Black Swan and Against the Gods that I would rate higher, neither of these can beat Deep Risk’s practical and straightforward advice on how to manage threats to your portfolio. Another reason I would recommend this book to you is that it both brief and inexpensive which is a bonus.