(MONEY Magazine) – The next time someone tells you that doctors are the worst investors, just mention William Bernstein, M.D. In 1990, Bernstein, a neurologist on the coast of Oregon, decided to cut his workload in half and devote his spare time to learning all he could about investing. The result is one of the great do-it-yourself stories of personal finance--and a model for how an investor can turn brains and energy into expertise. Today, Bernstein is the author of two best-selling investment books, the editor of an online journal of finance and a financial adviser who manages millions of dollars for other people. Among his many admirers: John Bogle, founder of the Vanguard funds. "He is an original thinker, and he opens up your mind," says Bogle. "There's no investor who wouldn't be rewarded by contact with him."

After spending 10 years immersed in the subject, Bill Bernstein can talk like no one else in the world of investing. He can talk of things that are fascinating but entirely irrelevant to your life--why September is the worst month for the stock market, why Nobel prizewinner Paul Samuelson is unique among economists, why the relationship between the population of Pakistan and its economic growth rate is a surprise. And he can talk of things that will make your heart stop: Why your retirement portfolio could be in worse trouble than you think. Why the people we're relying on to fix our problems--the financial services industry--are unlikely to get us out of this mess. Finally, why we are our own worst enemies as investors, and what we can do about it.

"IT'S NOT BRAIN SURGERY"

On a spring weekend, I flew to Portland to meet with Bernstein. To prepare for the interview, I opened a folder of articles from EfficientFrontier .com, where he posts his finance journal. Showing the dazzling intellectual versatility that's made Efficient Frontier a must-click website for finance connoisseurs, Bernstein's articles explore such topics as why value stocks outperform growth stocks, the importance of concrete to financial progress and how to clean up the ethical cesspool of Wall Street. In fact, the articles seemed to deal with everything except the mystery I wanted to solve: How did a doctor in the backwoods of Oregon, with no formal training in finance, turn himself into such a provocative investment thinker?

When I met Bernstein for dinner at a Lebanese restaurant, the mystery only deepened. Stocky and narrow-eyed, with spiky hairs sticking up from a balding cranium, and sporting a big, unruly, silver-speckled beard, he looked not like the tweedy professorial type I had expected but like a bemused elf who had ambled down from the woods around Portland.

After a few minutes of conversation, though, it was clear which of us was the bumpkin. "You mean to say neurology is not brain surgery?" I asked. It turns out that my confusion between neurology (treating illnesses of the brain) and neurosurgery (cutting open the brain) is typical. "I tell people sometimes, investing might be tough, but it's not brain surgery," Bernstein chuckled.

Then he shifted into high gear, telling me why the problems facing Social Security stem from decisions made back in 1883 by Otto von Bismarck, the founder of modern Germany. (In those days, almost no one lived to age 65, so Bismarck's government rarely needed to honor its promise of a guaranteed pension; but that promise might bankrupt the U.S. system now that so many people live into their eighties.) Next he explained what we can learn from the yields on Renaissance Venetian bonds (or prestiti): Even the buyers of safe investments face the risk of a huge loss if they pay too much in the first place.

Bernstein, who still sees patients and occasionally lectures on medicine at his hospital in Coos County, on the Oregon coast about 200 miles south of Portland, is a natural performer. When he is making a point, he chops the air into blocks and moves them, so you can almost see his arguments in physical form--stocks here, bonds there, gold over here. He guides each line of inquiry toward a dramatic denouement. As he approaches the surprise twist, his brow contracts, his eyes narrow. His fingers press together, as if crushing the premise to its core; then they spring open. Voila! Nibbling on hummus and pita bread, Bernstein hammered away for more than two hours, until loud music and a belly dancer in blue robes whirling around the tables ended our conversation.

Early the next morning, at the more sedate Heathman Hotel, I asked for his life story.

REVENGE OF THE NERD

Bernstein, now 54, was born in Philadelphia and schooled in California. After earning a Ph.D. in chemistry at the University of California at Berkeley in just three years, Bernstein decided that he wanted to work more closely with people than he could as a chemist, so he went back to school. Armed with an M.D. from UC--San Francisco, he became the only neurologist in Coos County: "I was an idealist. I wanted to make a difference."

He got his wish. From 1980 to 1990, Bernstein worked 80 hours a week. He saw young men and women with migraines and older patients whom he lost, day by day, to Alzheimer's or Parkinson's. After 10 years, the stress got to him. "Burning out was the best scenario," he says slowly. "Far worse things happen to people who work too hard."

He took on a partner in his medical practice and cut his workload to 40 hours a week. (To Bernstein, that's a part-time job.) He wanted to travel, spend time with his wife and three children and--as a hobby--learn more about how to invest his money. Before long, the intensity of that new hobby would rival the intensity of his old job.

Even as a full-time neurologist, Bernstein managed his own money. Yet the scientist in him was never fully satisfied with the way he invested: "I didn't really know what I was doing." Nor, for that matter, did anyone else, it seemed to him. One day, a retirement adviser gave a seminar to the doctors at Bernstein's hospital, urging them to pack their portfolios with small, fast-growing stocks. "Do you actually know what the returns on small-cap growth stocks are?" Bernstein demanded. The adviser couldn't cite a single statistic.

So once he cut back at work, Bernstein decided to learn all he could about investing. The first thing he needed, naturally, was data--the raw numbers on the risk and return of every kind of investment he could think of. How else could a scientist sort out good from bad and true from false?

Bernstein spent months cajoling investment firms like T. Rowe Price and Nomura Securities into sending him spreadsheets of market returns. He analyzed the data himself, ignoring the conclusions of earlier researchers. After all, a good scientist takes nothing for granted. And Bernstein read everything he could find about finance. Bernstein denies that there's anything astonishing about the way he transformed himself into an investment expert in his spare time. "Anyone, in this day and age, can go to a library, or go online, and get access to the primary literature," he shrugs. "You can very quickly become as well informed as an academic."

In 1995, after some five years of study, he was confident that he knew enough to write a book. While on a monthlong vacation in Italy with his family, he pounded out The Intelligent Asset Allocator, a 206-page work arguing that most people do their investing absolutely backward: Instead of trying to trade individual securities, you should buy entire markets--all big, cheap U.S. stocks or all government bonds--and then essentially do nothing else. Bernstein sent the manuscript to several publishers, but no one wanted an investing book by a no-name neurologist.

When the going gets tough, the tough take another vacation. In early 1996, on holiday in Australia, Bernstein launched his Efficient Frontier website and posted his book there. In no time, Bernstein had an Internet fan club of investment experts and finance professors from MIT and Yale. In 2001, McGraw-Hill published The Intelligent Asset Allocator. With his website still drawing new admirers, Bernstein produced his second book, The Four Pillars of Investing, in 2002.

THEORY VS. PRACTICE

Next came a surprise. "When you write about finance," he marvels, "people ask you to manage their money." Before long, Bernstein had become a registered investment adviser. Along with his business partner, Susan Sharin, he manages $70 million of other people's money. "If you had told me 10 years ago that I would be where I am today in finance," says Bernstein, "I would have laughed at you."

In setting up Efficient Frontier Advisors, Bernstein took several steps to avoid becoming part of the very thing he despises--the investment establishment. First, he keeps costs low. The firm's annual fees top out at 0.32% of assets. Second, he invests exclusively in index funds from Vanguard and Dimensional Fund Advisors. Finally, he says, "we only take on clients who understand what we're doing." (Efficient Frontier's assets come from a grand total of six investors--and the firm will accept no client with less than $10 million to invest.)

And just what does Bernstein's firm do? He and Sharin make reasonable estimates about a client's tolerance for risk and his desired returns. Then they use their database of historical returns (and their own judgment) to assemble portfolios of index funds holding a variety of assets that should produce an ideal trade-off between risk and return. In assembling portfolios, they draw from a wide menu of asset classes, including large U.S. value stocks, small emerging markets stocks, REITs, gold stocks and U.S. microcaps.

What about individuals who don't have access to that kind of computer power? Use common sense instead, says Bernstein. Be conservative. A mix of 60% stocks and 40% bonds will work just fine for most investors. Or you can hold a low-cost balanced fund (one that owns both stocks and bonds) like Vanguard Wellington or Wellesley, or a "life cycle" portfolio spreading its bets across several kinds of assets, ideally through index funds. Sounds simple enough, I say.

Hardly, retorts Bernstein.

THE INVESTING TOOLBOX

In fact, this great self-taught investor doubts that most people will ever make good investors. Even though investing is not brain surgery. Even though it's just a matter of sticking to a basic plan. Four skills, Bernstein says, are absolutely essential for success.

First, you must be comfortable enough with numbers to understand their financial implications. "Mathematics is the language of investing," says Bernstein. The odds that any given fund manager will beat the market 12 years in a row are minuscule. But among thousands of managers, the odds that someone will beat the market 12 years in a row are close to 100%--and Legg Mason Value Trust's Bill Miller just happens to be the one. "I think the guy is a competent securities analyst," says Bernstein, "but he's also very lucky."

The next survival tool is a sense of history. "The simplest way of separating the managers who would be suckered into the dotcom mania from those who would not," he says, "would have been to administer a brief quiz on the 1929 crash." When stocks rise as wildly as they did in the late 1990s, they simply have to crash before long.

Next, says Bernstein, you need emotional toughness, the ability to sell stocks when they're rising or to grit your teeth and buy them when they fall. Even with a basic 60/40 stock-bond allocation, warns Bernstein, you are doomed to watch 30% of your wealth go down in flames at least once a generation, when stocks crash. "There are lots of people who say they can do that," he notes. "But at the end of the day, it turns out they can't."

The final secret? Independence. According to Bernstein, you are locked in a "life-and-death struggle" with the financial industry. Brokers? He has written that they service clients "the same way Bonnie and Clyde serviced banks." Mutual fund companies? Marketing machines peddling overpriced underperformers. The business press? "There's a loose conspiracy between the financial media and the investment industry," he says. "They've sold the American people on this idea that they need active management, that they need market timing."

Will people stop entrusting their savings to pricey advisers, dodgy funds and hot stocks rather than to a diversified basket of index funds? "No," he answers flatly. "We're dealing with the human animal, with human nature. We can make progress, but only so much. In the best of all possible worlds, 95% of people are in an index, but we're never going to get there."

"IT'S A WONDERFUL WORLD"

So Bernstein is focusing his mental energies on something besides investing. Now he wants to explain everything that has happened to humankind in the past two centuries.

Bernstein has just finished his third book. He describes it this way: "It looks at the vast sweep of the past 200 years and asks, Why is there now economic growth? Before the year 1800, people had lived at a subsistence level for thousands of years. What happened to change the way humans lived?" He starts to tell me. A convergence of four developments. Scientific rationalism, property rights, capital markets and... The conversation veers in a different direction before he even gets to No. 4.

It seems impossible that an amateur could seriously tackle such a complex topic. So I called an eminent financial historian, Richard Sylla of New York University, who has had a peek at Bernstein's new book. "Bernstein has a terrific range--ancient Rome, the Middle Ages, Dutch and English history," says Sylla. "He seems to have delved deeply into the topic."

While studying investments has led Bernstein to doubt our capacity to learn from our mistakes, his historical research has had the opposite effect. Take the long view, he says, and you note a constant, cumulative, immense improvement in the quality of life. The average person in Mexico now lives better than the average person did in the world's richest country, Britain, 100 years ago! "All things considered," says Bernstein, "it's a wonderful world."

Terrorism and Iraq? "That's nothing compared to what your father and mine had to deal with," he says. "Better a hundred bin Ladens than one Adolf Hitler. When you look at things from the long term, life looks good."

It's 11 a.m. I tell Bernstein, who has been talking nonstop for three hours, that our interview has to end: My plane leaves at 1:30. Insisting on showing me around town before I leave, Bernstein drags me to what he calls "the most exciting place in all of Portland." It turns out to be a nirvana for nerds--the giant Powell's bookstore, where he squires me through the sections on history, economics and investing.

Stopping in front of a wall of maps, he begins to talk about his love of hiking. It occurs to me that Bernstein resembles a modern-day Thoreau, an intellectual pioneer equally interested in a rugged physical landscape and an untamed terrain of ideas. Just as we are about to leave, he walks off for a moment, and I find him looking at a book on airplanes.

What's his interest in planes? I ask.

"I can fly a plane," he says in a distant voice. "I used to own one."

"Planes?" I wake up. "What do you mean--you fly planes?" In all these hours of talk, Bernstein had never said a word about that.

As if he had been caught without his clothes on, Bernstein slinks off, mumbling to himself, to look at another book. I can only whip out my pen and look at the clock on the wall with a touch of panic. It's close to noon already. Just an hour and a half to my flight, and so much more to learn about Dr. Bill Bernstein.