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The Four Pillars of Investing: Lessons for Building a Winning Portfolio
Sound, sensible advice from a hero to frustrated investors everywhere William Bernstein's The Four Pillars of Investing gives investors the tools they need to construct top-returning portfolios--without the help of a financial adviser. In a relaxed, nonthreatening style, Dr. Bernstein provides a distinctive blend of market history, investing theory, and behavioral finance, one designed to help every investor become more self-sufficient and make better-informed investment decisions. The 4 Pillars of Investing explains how any investor can build a solid foundation for investing by focusing on four essential lessons, each building upon the other. Containing all of the tools needed to achieve investing success, without the help of a financial advisor, it
316 pages, Hardcover
First published April 26, 2002
About the author
William J. Bernstein
27 books409 followersWilliam J. Bernstein is an American financial theorist and neurologist. His research is in the field of modern portfolio theory and he has published books for individual investors who wish to manage their own equity portfolios. He lives in Portland, Oregon.
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September 9, 2021
An investment adviser and I were talking about the financial books we had read, and he highly recommended this book as the next on my list. I can see why! Instead of immediately offering advice on how to invest, Bernstein takes a step back and makes sure you understand market theory, the history of the markets, the role of psychology in choosing investments, and the very real impact of expenses and the media's influence.
The book contains statistics, tables, graphs, analogies, examples, and theory in a decently proportioned mix; my eyes never glazed over because of too many numbers. All this background information ensures that your investment decisions will be based on a wealth of data, rather than blindly following his recommendations.
I agreed with Bernstein in almost all areas, with the exception of tilting or overweighting market sectors. There are 2 camps of stock fund investors: those who slice and dice the market and those who hold the total market. Bernstein points to the higher returns of value and small caps demonstrated by Fama and French and others, and recommends overweighting them and underweighting growth. John Bogle, on the other hand, preaches that the market is so efficient that there's no free lunch (higher returns) in any one sector over the long term, so it's better to just hold the entire market in a market cap weighted fund. I'm not entirely convinced either way, but I tend to side with Bogle.
Bernstein advocates wide diversification, passively managed index funds, and buy-and-hold for the long term. This book is similar to The Little Book of Common Sense Investing, The New Coffeehouse Investor, and The Lazy Person's Guide to Investing, but provides a better explanation of the theory behind the practice. As a "lazy" buy-and-hold investor, I put myself squarely in the camp of these authors.
The book presents the Four Pillars of Investing, then shows how to use the pillars to assemble a portfolio.
Pillar 1: Investment Theory
• High returns require high risk.
• The market is efficient. Own it all by indexing.
• Build a portfolio of mostly the total US stock market, some small US, and some large international. If desired, add small and large value and REITs.
Pillar 2: Investment History
The more history you know, the better prepared you'll be for the market's ups and downs.
Pillar 3: Investment Psychology
• Focus on long-term data. Large and small value outperform large growth.
• Returns are random; don't imagine patterns.
Pillar 4: Investment Business
• Pay attention to fees and expenses.
• Ignore almost all investing media.
Here are more detailed notes:
Notes
Pillar 1: Investment Theory
• High previous returns usually indicate low future returns; low previous returns usually mean high future returns.
• Because of their higher risk, small caps outperform large caps by 1.5%/year on average.
• Good (growth) companies are generally bad stocks; bad (value) companies are generally good stocks.
• Value stocks have higher return than growth.
• When the political and economic outlook is brightest, returns are lowest. When things look darkest, returns are highest.
You can have 1 of 2 mutually exclusive investing goals:
1. maximize your chances of getting rich
2. minimize your chances of missing goals or dying poor.
• You can't time the market or pick winning stocks, so asset allocation is the only factor you can control.
• Index the whole market.
• Start with a percentage of bonds equal to your age.
• Hold 15 - 40% of stocks in foreign stocks.
• REITs have returns about equal to the stock market; allocate a max of 15%.
• Young people should have a max of 75% in stocks, with the rest in short-term bonds.
Pillar 2: Investment History
• Bubbles have occurred throughout the market's history (canals, railroads, 1920s, 1960s) and will continue.
• Basic rule of technology investing: users, not makers, profit most.
Pillar 3: Investment Psychology
• In the next decade, the last decade's worst-performing investment usually does better than the last decade's best-performing investment.
• The most exciting assets have the lowest returns; the most boring ones have the highest.
Pillar 4: Investment Business
• Ignore financial media. The collective wisdom of the market is the best adviser.
• The only guidance you need is with getting your asset allocation right; after that, it's self-discipline.
Investment Strategy
Taxable accounts
• Own the market in a tax-efficient index fund tracking the Russel 3000 or Wilshire 5000.
• Hold municipal bonds, Treasuries, and corporate bonds.
• Rebalance only with fund distributions, inflows, and outflows
Tax-sheltered accounts
• Split the market into large market, large value, small market, small value, and REITs.
• Hold government and corporate bonds.
• Rebalance every 2-3 years.
• Don't hold growth stocks; they're overvalued and have the lowest long-term returns.
• For less than $5,000 - 10,000 in bonds, use a bond index fund. For larger amounts, buy Treasuries directly, and use the Vanguard Short-Term Corporate fund for the non-Treasury portion.
• Don't hold more than 80% in stocks.
• Keep the maturity of your bond portfolio 1-5 years.
Portfolio for age 20-30
Assumes 60/40 stock/bond split. Adjust as necessary for other proportions.
32.5% large cap
12.5% international
7.5% REIT
7.5% small value
40% cash and bonds
Later, add large value, small cap, corporate bonds, precious metals, split international by region, and add TIPS.
Use value averaging instead of dollar-cost averaging: try to hit a target amount each month. If the fund declines, you must invest more. If the fund goes up, invest less. This forces investment at market bottoms rather than tops.
The book contains statistics, tables, graphs, analogies, examples, and theory in a decently proportioned mix; my eyes never glazed over because of too many numbers. All this background information ensures that your investment decisions will be based on a wealth of data, rather than blindly following his recommendations.
I agreed with Bernstein in almost all areas, with the exception of tilting or overweighting market sectors. There are 2 camps of stock fund investors: those who slice and dice the market and those who hold the total market. Bernstein points to the higher returns of value and small caps demonstrated by Fama and French and others, and recommends overweighting them and underweighting growth. John Bogle, on the other hand, preaches that the market is so efficient that there's no free lunch (higher returns) in any one sector over the long term, so it's better to just hold the entire market in a market cap weighted fund. I'm not entirely convinced either way, but I tend to side with Bogle.
Bernstein advocates wide diversification, passively managed index funds, and buy-and-hold for the long term. This book is similar to The Little Book of Common Sense Investing, The New Coffeehouse Investor, and The Lazy Person's Guide to Investing, but provides a better explanation of the theory behind the practice. As a "lazy" buy-and-hold investor, I put myself squarely in the camp of these authors.
The book presents the Four Pillars of Investing, then shows how to use the pillars to assemble a portfolio.
Pillar 1: Investment Theory
• High returns require high risk.
• The market is efficient. Own it all by indexing.
• Build a portfolio of mostly the total US stock market, some small US, and some large international. If desired, add small and large value and REITs.
Pillar 2: Investment History
The more history you know, the better prepared you'll be for the market's ups and downs.
Pillar 3: Investment Psychology
• Focus on long-term data. Large and small value outperform large growth.
• Returns are random; don't imagine patterns.
Pillar 4: Investment Business
• Pay attention to fees and expenses.
• Ignore almost all investing media.
Here are more detailed notes:
Notes
Pillar 1: Investment Theory
• High previous returns usually indicate low future returns; low previous returns usually mean high future returns.
• Because of their higher risk, small caps outperform large caps by 1.5%/year on average.
• Good (growth) companies are generally bad stocks; bad (value) companies are generally good stocks.
• Value stocks have higher return than growth.
• When the political and economic outlook is brightest, returns are lowest. When things look darkest, returns are highest.
You can have 1 of 2 mutually exclusive investing goals:
1. maximize your chances of getting rich
2. minimize your chances of missing goals or dying poor.
• You can't time the market or pick winning stocks, so asset allocation is the only factor you can control.
• Index the whole market.
• Start with a percentage of bonds equal to your age.
• Hold 15 - 40% of stocks in foreign stocks.
• REITs have returns about equal to the stock market; allocate a max of 15%.
• Young people should have a max of 75% in stocks, with the rest in short-term bonds.
Pillar 2: Investment History
• Bubbles have occurred throughout the market's history (canals, railroads, 1920s, 1960s) and will continue.
• Basic rule of technology investing: users, not makers, profit most.
Pillar 3: Investment Psychology
• In the next decade, the last decade's worst-performing investment usually does better than the last decade's best-performing investment.
• The most exciting assets have the lowest returns; the most boring ones have the highest.
Pillar 4: Investment Business
• Ignore financial media. The collective wisdom of the market is the best adviser.
• The only guidance you need is with getting your asset allocation right; after that, it's self-discipline.
Investment Strategy
Taxable accounts
• Own the market in a tax-efficient index fund tracking the Russel 3000 or Wilshire 5000.
• Hold municipal bonds, Treasuries, and corporate bonds.
• Rebalance only with fund distributions, inflows, and outflows
Tax-sheltered accounts
• Split the market into large market, large value, small market, small value, and REITs.
• Hold government and corporate bonds.
• Rebalance every 2-3 years.
• Don't hold growth stocks; they're overvalued and have the lowest long-term returns.
• For less than $5,000 - 10,000 in bonds, use a bond index fund. For larger amounts, buy Treasuries directly, and use the Vanguard Short-Term Corporate fund for the non-Treasury portion.
• Don't hold more than 80% in stocks.
• Keep the maturity of your bond portfolio 1-5 years.
Portfolio for age 20-30
Assumes 60/40 stock/bond split. Adjust as necessary for other proportions.
32.5% large cap
12.5% international
7.5% REIT
7.5% small value
40% cash and bonds
Later, add large value, small cap, corporate bonds, precious metals, split international by region, and add TIPS.
Use value averaging instead of dollar-cost averaging: try to hit a target amount each month. If the fund declines, you must invest more. If the fund goes up, invest less. This forces investment at market bottoms rather than tops.
January 31, 2016
In short, Bernstein advocates wide diversification through a portfolio of passively managed index funds in different asset classes, and buy-and-hold for the long term
Pillar 1: Investment Theory
• High returns requires high risk.
• The market is efficient. Own it all by indexing.
• You can't time the market or pick winning stocks, so asset allocation is the only factor you can control, hence index the whole market.
Pillar 2: Investment History
The more history you know, the better prepared you'll be for the market's ups and downs.
• Basic rule of technology investing: users, not makers, profit most.
Pillar 3: Investment Psychology
• Focus on long-term data. Large and small value outperform large growth.
• Returns are random; don't imaging patterns.
Pillar 4: Investment Business
• Pay attention to management fees and expenses, they are costly in the long run.
• Ignore almost all investing media.
• Start with a percentage of bonds equal to your age.
• Hold 15 - 40% of stocks in foreign stocks.
• REITs have returns about equal to the stock market; allocate a max of 15%.
• Young people should have a max of 75% in stocks, with the rest in short-term bonds.
Portfolio for age 20-30
Assumes 60/40 stock/bond split32.5% large cap
12.5% international
7.5% REIT
7.5% small value
40% cash and bonds
Later, add large value, small cap, corporate bonds, precious metals, split international by region, and add TIPS.
Use value averaging instead of dollar-cost averaging: try to hit a target amount each month. If the fund declines, you must invest more. If the fund goes up, invest less. This forces investment at market bottoms rather than tops
Pillar 1: Investment Theory
• High returns requires high risk.
• The market is efficient. Own it all by indexing.
• You can't time the market or pick winning stocks, so asset allocation is the only factor you can control, hence index the whole market.
Pillar 2: Investment History
The more history you know, the better prepared you'll be for the market's ups and downs.
• Basic rule of technology investing: users, not makers, profit most.
Pillar 3: Investment Psychology
• Focus on long-term data. Large and small value outperform large growth.
• Returns are random; don't imaging patterns.
Pillar 4: Investment Business
• Pay attention to management fees and expenses, they are costly in the long run.
• Ignore almost all investing media.
• Start with a percentage of bonds equal to your age.
• Hold 15 - 40% of stocks in foreign stocks.
• REITs have returns about equal to the stock market; allocate a max of 15%.
• Young people should have a max of 75% in stocks, with the rest in short-term bonds.
Portfolio for age 20-30
Assumes 60/40 stock/bond split32.5% large cap
12.5% international
7.5% REIT
7.5% small value
40% cash and bonds
Later, add large value, small cap, corporate bonds, precious metals, split international by region, and add TIPS.
Use value averaging instead of dollar-cost averaging: try to hit a target amount each month. If the fund declines, you must invest more. If the fund goes up, invest less. This forces investment at market bottoms rather than tops
April 1, 2020
It's an interesting read about introduction to investing. I may agree on some parts of the book and disagree with some, but overall, your time investment in reading this one may or may not bear fruits in the near future.
Investment as they is like a water in the river. It will continue to flow as long as there will be no blockage on its way. It can become big or become smaller but it always depend on what canal or tunnel it passes through. Or maybe it might goes to the sea or ocean perhaps. 😀😄😂
The four pillars of investing are Theory, History, Psychology and the Business according to the author. Perhaps THEORiticallY people like invesment, but according to our HISTORY, investment is derailed or sometimes it fails to go up, but PSYCHOLOGicallY speaking it should go up higher, but before we think of the BUSINESS of investing , let's ask ourself are we ready to face the challenges ahead. ✌🏻️😊
Investment as they is like a water in the river. It will continue to flow as long as there will be no blockage on its way. It can become big or become smaller but it always depend on what canal or tunnel it passes through. Or maybe it might goes to the sea or ocean perhaps. 😀😄😂
The four pillars of investing are Theory, History, Psychology and the Business according to the author. Perhaps THEORiticallY people like invesment, but according to our HISTORY, investment is derailed or sometimes it fails to go up, but PSYCHOLOGicallY speaking it should go up higher, but before we think of the BUSINESS of investing , let's ask ourself are we ready to face the challenges ahead. ✌🏻️😊
June 20, 2008
In the introduction to his book, "The Four Pillars of Investing: Lessons for Building a Winning Portfolio," Dr. William Bernstein states that the "competent investor never stops learning." Yet, because the world of investing can be such a confusing place, it sometimes seems that the more you learn, the more confused you get. As a participant on the Bogleheads message board, I feel I am an educated investor but still I often get lost after reading all the different debates: Should I invest in total markets or slice and dice my portfolio? Should I invest all my money at once or adopt a dollar cost averaging philosophy? How much foreign exposure should I have? Is now the right time to buy REITs, or do I need them at all? One day, while perusing the message board and sifting through some of these same questions, I found a suggested investing reading list, and this book was listed as the starting point. In this straightforward book, explained with easy-to-understand examples, Dr. Bernstein provides a solid framework for investors to begin to answer some of these questions.
In setting this framework, Dr. Bernstein introduces readers to four basic concepts, or what he terms the four pillars of investing: the theory, history, psychology, and business of investing. The first pillar, the theory of investing, gets most of his attention, as it comprises the first 100 pages of the book and explains how the bond and stock markets work. In this section, Dr. Bernstein emphasizes what he calls the "most important concept in finance" – the relationship between risk and reward. If investors want high returns, they must take great risks. Following this logic, Dr. Bernstein makes some conclusions that may seem foreign to most investors. For example, the best time to invest is not when things are going well, but when they are going poorly. Those who invest during a bubble are not taking a risk and therefore can expect low returns, whereas those investing during a bear market are taking a risk and therefore can expect (but will not be guaranteed) higher returns. Similarly, those who invest in "good companies" like Wal-Mart can expect lower returns than those who invest in "bad companies" like K-Mart, because good companies, with low risk, are generally bad stocks, while bad companies are generally good stocks. This idea – that high returns cannot be achieved without significant risk – is the key concept Dr. Bernstein continues to emphasize throughout the book.
While the first pillar gets the most attention, Dr. Bernstein terms the second pillar, the history of investing, as "the one that causes the most damage" to investors. What separates the professional investor from the amateur investor is that the professional recognizes that bear markets are a fact of life – they inevitably come about once every generation, usually sparked by a new technological advance. Professional investors stay the course and don’t panic; they have a plan and stick with it. In fact, for beginning investors, a bear market is a blessing, allowing them to accumulate stocks at low prices. This concept again ties to the relationship between risk and return: throughout history, in times of great optimism, when prices are the highest and the risk is the lowest, future returns are the lowest, and when times look the bleakest, and risk is the highest, future returns are also the highest.
In the third pillar, the psychology of investing, this relationship between risk and return is again raised. Most investors follow conventional wisdom of the time, investing in specific stocks or asset classes that are currently the most successful and thus buying at high prices. Dr. Bernstein provides two strategies to counter this psychology. He advises readers first to identify the conventional wisdom of the time and do the exact opposite. He also advises readers that assets with the highest future returns tend to be the ones that are currently most unpopular. The investor that is able to go against the flow – to stick with unpopular asset classes and pay attention to his or her entire portfolio return – in the long-run will be the most successful.
Finally, the fourth pillar concerns the business of investing, which details how brokers, analysts, and the media work together to make money at the expense of often ignorant investors by peddling bad or biased information. Instead of paying exorbitant fees to brokerage firms or financial advisors, which steer investors to underperforming managed funds, investors can buy low-expense index funds through companies like Vanguard and thus tap "into the most powerful intelligence in the world of finance" – the market itself, which is, according to Dr. Bernstein, the best advisor available.
Dr. Bernstein concludes his book by applying lessons learned from these four pillars and giving readers practical advice for how to construct their own portfolios. Although this section fell short of answering all my questions, the book as a whole serves as an essential investing guide in providing investors with a basic framework to use in evaluating the myriad of investing choices available. As even Dr. Bernstein concedes, "Four Pillars of Investing" is not an all-encompassing book on investing. It is not the only book you will need to read, and it is probably not the first investing book you should read, but it is nonetheless a book every investor should read.
In setting this framework, Dr. Bernstein introduces readers to four basic concepts, or what he terms the four pillars of investing: the theory, history, psychology, and business of investing. The first pillar, the theory of investing, gets most of his attention, as it comprises the first 100 pages of the book and explains how the bond and stock markets work. In this section, Dr. Bernstein emphasizes what he calls the "most important concept in finance" – the relationship between risk and reward. If investors want high returns, they must take great risks. Following this logic, Dr. Bernstein makes some conclusions that may seem foreign to most investors. For example, the best time to invest is not when things are going well, but when they are going poorly. Those who invest during a bubble are not taking a risk and therefore can expect low returns, whereas those investing during a bear market are taking a risk and therefore can expect (but will not be guaranteed) higher returns. Similarly, those who invest in "good companies" like Wal-Mart can expect lower returns than those who invest in "bad companies" like K-Mart, because good companies, with low risk, are generally bad stocks, while bad companies are generally good stocks. This idea – that high returns cannot be achieved without significant risk – is the key concept Dr. Bernstein continues to emphasize throughout the book.
While the first pillar gets the most attention, Dr. Bernstein terms the second pillar, the history of investing, as "the one that causes the most damage" to investors. What separates the professional investor from the amateur investor is that the professional recognizes that bear markets are a fact of life – they inevitably come about once every generation, usually sparked by a new technological advance. Professional investors stay the course and don’t panic; they have a plan and stick with it. In fact, for beginning investors, a bear market is a blessing, allowing them to accumulate stocks at low prices. This concept again ties to the relationship between risk and return: throughout history, in times of great optimism, when prices are the highest and the risk is the lowest, future returns are the lowest, and when times look the bleakest, and risk is the highest, future returns are also the highest.
In the third pillar, the psychology of investing, this relationship between risk and return is again raised. Most investors follow conventional wisdom of the time, investing in specific stocks or asset classes that are currently the most successful and thus buying at high prices. Dr. Bernstein provides two strategies to counter this psychology. He advises readers first to identify the conventional wisdom of the time and do the exact opposite. He also advises readers that assets with the highest future returns tend to be the ones that are currently most unpopular. The investor that is able to go against the flow – to stick with unpopular asset classes and pay attention to his or her entire portfolio return – in the long-run will be the most successful.
Finally, the fourth pillar concerns the business of investing, which details how brokers, analysts, and the media work together to make money at the expense of often ignorant investors by peddling bad or biased information. Instead of paying exorbitant fees to brokerage firms or financial advisors, which steer investors to underperforming managed funds, investors can buy low-expense index funds through companies like Vanguard and thus tap "into the most powerful intelligence in the world of finance" – the market itself, which is, according to Dr. Bernstein, the best advisor available.
Dr. Bernstein concludes his book by applying lessons learned from these four pillars and giving readers practical advice for how to construct their own portfolios. Although this section fell short of answering all my questions, the book as a whole serves as an essential investing guide in providing investors with a basic framework to use in evaluating the myriad of investing choices available. As even Dr. Bernstein concedes, "Four Pillars of Investing" is not an all-encompassing book on investing. It is not the only book you will need to read, and it is probably not the first investing book you should read, but it is nonetheless a book every investor should read.
June 3, 2008
Cheesy title, great book. I'm in the middle of his Intelligent Asset Allocator, which has a lot more math.
Here are the four pillars to save you some time:
1. Theory (how to price, why you should index)
2. History (Did you know the interest rate in ancient rome was 4%? You should.)
3. Psychology (ignore your instincts and what people say at dinner parties)
4. Business (stock brokers and business press -- not your friends)
Mr. Bernstein trained as a physician, so he brings a scientific mindset that I can relate to as someone with an engineering background. He also emphasizes learning as much history as possible, which aligns with my recent discovery that I really enjoy history.
Here are the four pillars to save you some time:
1. Theory (how to price, why you should index)
2. History (Did you know the interest rate in ancient rome was 4%? You should.)
3. Psychology (ignore your instincts and what people say at dinner parties)
4. Business (stock brokers and business press -- not your friends)
Mr. Bernstein trained as a physician, so he brings a scientific mindset that I can relate to as someone with an engineering background. He also emphasizes learning as much history as possible, which aligns with my recent discovery that I really enjoy history.
April 30, 2017
Very interesting book, well written but it isn't for people who want a quick buck. I liked how informative this book was. I just didn't really learn anything new. But then there are no new things under the sun. If you are serious about investing your money, remember diversification, patience, spend less, forget about deceiving the market and remember no one can predict the future, no matter how their "track records" may indicate otherwise. Finance 101: Past performance isn't indicative of future performance.
August 9, 2017
Not particularly memorable
October 26, 2015
This book started out well with the introduction and the history of the financial markets. One chapter of the book describe how the various financial intermediaries - brokers, fund houses and investment banks - all work to profit from the investors. It also shows that the basic role of financial press is marketing financial products and not providing information. William Bernstein correctly shows that the small investor always comes last in the hierarchy of the financial world.
As the book moves towards 'Efficient Market Hypothesis' and construction of portfolio, it started making less sense to me. Maybe because some things of the US stock market are not really similar to the Indian stock market. Here in India, it is easy to beat the indices.
There is a brief introduction to behavioural finance, but that is not enough. The author uses a lot of data to demonstrate the points and sometimes does not hit the mark. We all know how the data can be arranged and highlighted to show someone's point of view. Another thing that I did not like is that the author emphasises too much on relative performance rather than absolute performance.
From the perspective of the US investors, the book can be very useful. But not so much for us Indians.
As the book moves towards 'Efficient Market Hypothesis' and construction of portfolio, it started making less sense to me. Maybe because some things of the US stock market are not really similar to the Indian stock market. Here in India, it is easy to beat the indices.
There is a brief introduction to behavioural finance, but that is not enough. The author uses a lot of data to demonstrate the points and sometimes does not hit the mark. We all know how the data can be arranged and highlighted to show someone's point of view. Another thing that I did not like is that the author emphasises too much on relative performance rather than absolute performance.
From the perspective of the US investors, the book can be very useful. But not so much for us Indians.
July 5, 2012
Bernstein argues that the successful investor must understand four essential content areas: the theory, history, psychology, and business of investing. Practically speaking, he argues that the best portfolios build on that understanding will be based on indexed mutual funds in several key asset classes.
Bernstein’s theoretical understanding of the market is complex, and any short review will not do it justice. It is fair to say, however, that he argues that the market is much smarter and more efficient than any one of its actors. Trying to beat the market consistently, year after year, is a pursuit doomed to failure. Also key to his understanding is the assessment that risk and reward go hand in hand. The latter does not come without the former.
His history of the market is to some extent a way to support the theory outlined in the book’s first section, but he’s a good storyteller, and many of the theoretical technicalities are easier to understand in historical narrative than pure mathematics. Berstein emphasizes the historical fact that the market periodically goes mad, resulting in bubbles and bursts.
Bernstein’s market psychology can be summed up by saying that the investor is his own worst enemy. It’s easy to understand “buy low, sell high.” It’s quite another thing to buy when the whole world is selling, or vice-versa. Following fads, however, is a quick way to deplete a portfolio!
It’s not unusual to hear insiders critique their own industry. Politicians, educators, athletes, academics, and many others routinely dismiss others in their fields. It was still surprising, however, to read the near utter contempt in which Bernstein holds the profession of finance. They’re all out to get your money! Stock brokers, mutual fund managers, and finance writers—he heaps scorn on them all. Which isn’t to say he doesn’t back up his scorn with lots of data. He certainly does, but in the end the people who profess to want to help you earn money are really more interested in taking it from you.
It may be trite to boil Bernstein’s investment advice down to “if you can’t beat, join ’em,” but that’s pretty close to it. Since the individual investor or fund manager is highly unlikely to beat the market consistently over the life of a decent portfolio, the best thing to do is bet with the market indices themselves. His advice is more subtle than that, of course, but playing the index is a pretty close approximation of his thesis.
Other than a long-ago reading of Peter Lynch’s Beat the Street, this is the first serious treatment of investing that I’ve read, so I’m not particularly qualified to critique Bernstein’s arguments. It is fair to say, however, that he argues clearly, backs up his assessments with understandable data, and is quick to point out the weaker or more questionable points of his thesis.
Bernstein’s theoretical understanding of the market is complex, and any short review will not do it justice. It is fair to say, however, that he argues that the market is much smarter and more efficient than any one of its actors. Trying to beat the market consistently, year after year, is a pursuit doomed to failure. Also key to his understanding is the assessment that risk and reward go hand in hand. The latter does not come without the former.
His history of the market is to some extent a way to support the theory outlined in the book’s first section, but he’s a good storyteller, and many of the theoretical technicalities are easier to understand in historical narrative than pure mathematics. Berstein emphasizes the historical fact that the market periodically goes mad, resulting in bubbles and bursts.
Bernstein’s market psychology can be summed up by saying that the investor is his own worst enemy. It’s easy to understand “buy low, sell high.” It’s quite another thing to buy when the whole world is selling, or vice-versa. Following fads, however, is a quick way to deplete a portfolio!
It’s not unusual to hear insiders critique their own industry. Politicians, educators, athletes, academics, and many others routinely dismiss others in their fields. It was still surprising, however, to read the near utter contempt in which Bernstein holds the profession of finance. They’re all out to get your money! Stock brokers, mutual fund managers, and finance writers—he heaps scorn on them all. Which isn’t to say he doesn’t back up his scorn with lots of data. He certainly does, but in the end the people who profess to want to help you earn money are really more interested in taking it from you.
It may be trite to boil Bernstein’s investment advice down to “if you can’t beat, join ’em,” but that’s pretty close to it. Since the individual investor or fund manager is highly unlikely to beat the market consistently over the life of a decent portfolio, the best thing to do is bet with the market indices themselves. His advice is more subtle than that, of course, but playing the index is a pretty close approximation of his thesis.
Other than a long-ago reading of Peter Lynch’s Beat the Street, this is the first serious treatment of investing that I’ve read, so I’m not particularly qualified to critique Bernstein’s arguments. It is fair to say, however, that he argues clearly, backs up his assessments with understandable data, and is quick to point out the weaker or more questionable points of his thesis.
October 23, 2018
Awesome. Contains a LOT of theory, maths and can be hard to read. But it really defines a framework to work on your own portfolio.
I always love the books that starts from the beginning of theory, from basics principles, deriving step by step the correct conclusions, and not by making you accept a lot of assumptions and “jumps of faith”. The author talks freely about his opinion of active managed funds.
This one and A Random Walk Down Wall Street are my favorites to introduce somebody to investing.
And remember, if your family and friends talk about some trendy investment, just run, run!!!
I always love the books that starts from the beginning of theory, from basics principles, deriving step by step the correct conclusions, and not by making you accept a lot of assumptions and “jumps of faith”. The author talks freely about his opinion of active managed funds.
This one and A Random Walk Down Wall Street are my favorites to introduce somebody to investing.
And remember, if your family and friends talk about some trendy investment, just run, run!!!
January 26, 2009
Re-reading this in light of the money meltdown.
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One of the best books about investing I've read. By no means the first one you should read, but once you've got some of the basics under control, this helps takes it to a very sensible level. Asset allocation and the history of booms and busts are key here.
Though I just finished it a couple of weeks ago, I'd like to start re-reading it again soon. Very readable and interesting, though I can do without ever hearing about the tulip bulb bubble yet again.
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One of the best books about investing I've read. By no means the first one you should read, but once you've got some of the basics under control, this helps takes it to a very sensible level. Asset allocation and the history of booms and busts are key here.
Though I just finished it a couple of weeks ago, I'd like to start re-reading it again soon. Very readable and interesting, though I can do without ever hearing about the tulip bulb bubble yet again.
November 29, 2020
Widely considered as the bible of investing principles, this book provides the reader with a nice foundation of investment theory. It outlines the main pitfalls to avoid when dealing with different investment market players.
June 21, 2020
One does not simply encounter a book with condenses so much information while having the ability to lay it out in such a readable and understandable way. I had heard a lot about Bernstein prior to reading this book, but it is upon delightfully devouring its pages that I understood the greatness from his teaching.
The book is presented in two main parts. First, the four pillars from which the book title comes from, where the authors in a clear and friendly way introduces a basic theoretical approach to investing, from its main mathematical proceedings, to the must-know economic and stock history and its bubbles, along with all the industry behind. That in itself would have been great, but then he unravels a magnificent part II, in which he unveils the reason why although the market is a winner, most of the misinformed players are losers. Its attacks to the finance industry and the media supporting it are both just and hurtful, and its sensible counsel to how one should approach those beasts whose main purpose is to cunningly transfer your hard earned money to their pockets.
Adding this one to the collection, I have read some books about investing, all giving me insightful information and decisiveness as to how approach the beast. However, were I to choose between the grandeur of Peter Lynch or the sensible and realistic approach of both Bogle's The Little Book of Common Sense Investing: The Only Way to Guarantee Your Fair Share of Stock Market Returns and Will Bernstein, I would so much choose the latter. And believe it or not, your pocket too.
The book is presented in two main parts. First, the four pillars from which the book title comes from, where the authors in a clear and friendly way introduces a basic theoretical approach to investing, from its main mathematical proceedings, to the must-know economic and stock history and its bubbles, along with all the industry behind. That in itself would have been great, but then he unravels a magnificent part II, in which he unveils the reason why although the market is a winner, most of the misinformed players are losers. Its attacks to the finance industry and the media supporting it are both just and hurtful, and its sensible counsel to how one should approach those beasts whose main purpose is to cunningly transfer your hard earned money to their pockets.
Adding this one to the collection, I have read some books about investing, all giving me insightful information and decisiveness as to how approach the beast. However, were I to choose between the grandeur of Peter Lynch or the sensible and realistic approach of both Bogle's The Little Book of Common Sense Investing: The Only Way to Guarantee Your Fair Share of Stock Market Returns and Will Bernstein, I would so much choose the latter. And believe it or not, your pocket too.
April 10, 2010
After years of studying technical and fundamental analysis, I can finally rest. Dr. Bernstein William J. Bernstein, a buy-and-hold, dollar cost averaging, index investing, portfolio rebalancer has made me a believer. I would have created a synopsis of the book for quick reviews down the road, but Bernstein conveniently included one at the end of each chapter, and one in the last chapter covering the whole book. The book is well-written, intelligent, and extraordinarily practical.
September 25, 2015
A very good book I'd recommend to anyone interested in investing. It covers all the fundamentals one should know to try to avoid making big mistakes. Though I do disagree with his assumption that the market is rational in that risk and return will always be proportionally related.
May 2, 2019
In one word: amazing!
It trashes the financial news that we, as traders or just regular joe's, receive on a daily basis. It details how our banks and brokers are not our friends and it teaches us how to invest properly. We will not find the next Microsoft, that's for sure, but we won't ruin our financial life by trying to do it. Also, we will not be hostages of the hefty fees charged by banks and financial brokers.
It trashes the financial news that we, as traders or just regular joe's, receive on a daily basis. It details how our banks and brokers are not our friends and it teaches us how to invest properly. We will not find the next Microsoft, that's for sure, but we won't ruin our financial life by trying to do it. Also, we will not be hostages of the hefty fees charged by banks and financial brokers.
March 30, 2023
Gives some nice compact summaries on several basic/key investment assets. In addition, it highlights the importance of the risk-return trade-off and subsequently emphasizes to always (try to) keep emotions out of the equation and be prepared for an inevitable crash that will happen in the future. Finally, it really initiated me to go and dive in my own financial status and make a plan for the future.
March 22, 2024
Probablemente el primer libro sobre finanzas que haya que leer. Está escrito muy ameno, y el contenido es de altísima importancia. Rompe con todas las creencias pseudocientíficas de los actuales canales de YouTube o blogs sobre finanzas. Por ello, es un básico para aprender a invertir y no ser seducido por las técnicas de marketing actuales en el mundo online. Sólo criticaría que la séptima edición sigue teniendo información actualizada hasta 2002, es decir, nunca se actualizó la base de datos original.
January 29, 2021
The current GME stuff is fascinating in a sociological way, but there are going to be some big surprises for some.
My gems:
P45 speculation vs. investment vs. purchase
P102 “most of the investment industry is engaged in non-productive work
P159 “The burnt customer certainly prefers to believe that he has been robbed rather than that he has been a fool on the advice of fools.”
P171 “one of the most deadly investment traits is the need for excitement”
P179 shopping list of maladaptive behaviors-- herd mentality, overconfidence, recency, the need to be entertained, myopic risk aversion, the great company/great stock illusion, pattern hallucination, mental accounting, and the country club syndrome
“Minimize your chances of dying poor”
P185 “there is nothing new in the markets, only the history you haven’t read”
P196 “the average broker is a salesman, not an expert in finance.”
P201 “what is best for the client is to keep investment costs and turnover as low as possible, which also minimizes a broker’s income"
P220 “you can only write so many articles that say “buy the market, keep your costs down, and don’t get too fancy.””
P223 “The surprising thing is that the news you need to know is mostly old--sometimes very old.”
My gems:
P45 speculation vs. investment vs. purchase
P102 “most of the investment industry is engaged in non-productive work
P159 “The burnt customer certainly prefers to believe that he has been robbed rather than that he has been a fool on the advice of fools.”
P171 “one of the most deadly investment traits is the need for excitement”
P179 shopping list of maladaptive behaviors-- herd mentality, overconfidence, recency, the need to be entertained, myopic risk aversion, the great company/great stock illusion, pattern hallucination, mental accounting, and the country club syndrome
“Minimize your chances of dying poor”
P185 “there is nothing new in the markets, only the history you haven’t read”
P196 “the average broker is a salesman, not an expert in finance.”
P201 “what is best for the client is to keep investment costs and turnover as low as possible, which also minimizes a broker’s income"
P220 “you can only write so many articles that say “buy the market, keep your costs down, and don’t get too fancy.””
P223 “The surprising thing is that the news you need to know is mostly old--sometimes very old.”
Shelved as 'did-not-finish'
August 30, 2022This is me acknowledging that I bought this book and am never going to read it because I am not the person I was when I bought it. If that changes at some date in the future, I can always fish it out of my kindle library assuming that kindle libraries still exist at that point in the future.
March 9, 2024
El mejor libro sobre inversión que he leído, es de 2002 y no está actualizada la parte de los costes de los fondos de inversión. Por lo demás es de lectura obligatoria antes de empezar a invertir. Dice las cosas muy claras y fácil de leer pese a tener más de 400 páginas
July 10, 2019
i don't really understand much as it has so many numbers, tables and graphs. I'm pretty sure it is beneficial to those who are interested in investing in stock market!
July 13, 2020
Absolutely excellent. High emphasis on knowing financial history and relying on data. How to spot a bubble. Fairly mathematical and full of actionable insights.
Particularly enjoyed being taken to school on bonds and the value in one's portfolio.
If you intend to have any say in your future wealth, this is highly recommended.
Particularly enjoyed being taken to school on bonds and the value in one's portfolio.
If you intend to have any say in your future wealth, this is highly recommended.
September 15, 2020
Very recommendable book. It includes great pieces of advice about general financial knowledge and more advanced things that, in my opinion, are very useful for life. These are the kind of things that are not taught at school and definitely should.
As the disadvantages of this book I would say that it is a little bit dense and out of date (in some aspects).
Everyone (from economy/finance "connoisseurs" to completely new to the matter) should read this book for having a good knowledge basis about economics and finance.
As the disadvantages of this book I would say that it is a little bit dense and out of date (in some aspects).
Everyone (from economy/finance "connoisseurs" to completely new to the matter) should read this book for having a good knowledge basis about economics and finance.
June 27, 2023
Was enjoyable as an audiobook so it gets an extra star for that
July 23, 2018
Excellent summary of the basics of successful investing.
January 26, 2024
Highly recommended as a one stop book on investing for beginners and intermediates. Covers not just the maths of investing, but history, psychology and the business of investing. Always a pleasure to read Bernstein.
December 19, 2021
The book is a decent introduction for beginners, but offers little that can´t be found in other books on investing. A good summary/introduction without really anything that sets it apart.
Sometimes, the book is also a bit contradictory: Characteristics X and Y prove good stock selection criteria. Stock picking is a fools errand and people should go for indices instead. Two stars = it was ok.
Summary:
The wise investor knows short-term moves are random, and trying to time them is a fool´s errand. However, stocks go up over the very long run.
Wall street analysts have no clue where stock prices are going to go over the next 12 months, best ignore them.
Long term comfortable retirement means equities. Tbills are not going to substantially beat inflation.
Suprisingly, bad companies can make the best investments.
Gordon equation = expected market return = dividend yield + dividend growth rate
Market crashes are a gift for young investors, they can buy shares cheaply.
Forget about picking individual stocks. "You are not capable of beating the market. But do not feel bad, because no one else can, either."
After a stock wins the popularity contest, it´s unlikely to keep offering stellar returns.
Ignore stock brokers and the investing media. There is a conflict of interest. They do not profit from you getting rich, but rather from you being emotionally invested and thereby overtrading.
Sometimes, the book is also a bit contradictory: Characteristics X and Y prove good stock selection criteria. Stock picking is a fools errand and people should go for indices instead. Two stars = it was ok.
Summary:
The wise investor knows short-term moves are random, and trying to time them is a fool´s errand. However, stocks go up over the very long run.
Wall street analysts have no clue where stock prices are going to go over the next 12 months, best ignore them.
Long term comfortable retirement means equities. Tbills are not going to substantially beat inflation.
Suprisingly, bad companies can make the best investments.
Gordon equation = expected market return = dividend yield + dividend growth rate
Market crashes are a gift for young investors, they can buy shares cheaply.
Forget about picking individual stocks. "You are not capable of beating the market. But do not feel bad, because no one else can, either."
After a stock wins the popularity contest, it´s unlikely to keep offering stellar returns.
Ignore stock brokers and the investing media. There is a conflict of interest. They do not profit from you getting rich, but rather from you being emotionally invested and thereby overtrading.
April 13, 2021
This is a good book. Not incredible though. Just down to earth book on investment. If you are not convince passive investing or if you want some help for keeping on track, then you can give it a shot. Its four pillars are:
1. Returns are equivalent to Risk. If you have returns, it means you took risk. No way around it.
2. History shows: mania explode. Sooner or later, reality catches up. Funnily the book was written just before the burst of the .com bubble. It takes years, but it happens.
3. Psychology: we think we are better, and we know how to beat the market. But we don't. Our mind is made to recognize patterns even when there isn't. Moreover, even though market "go so high" or "are so flat" in the last few years (5 to 10), in the end, their returns average to their risk. They have always done so in the past.
4. Minimize the fees of your broker, mutual fund, advisor. They are here to take your money, most often not to see you make some.
1. Returns are equivalent to Risk. If you have returns, it means you took risk. No way around it.
2. History shows: mania explode. Sooner or later, reality catches up. Funnily the book was written just before the burst of the .com bubble. It takes years, but it happens.
3. Psychology: we think we are better, and we know how to beat the market. But we don't. Our mind is made to recognize patterns even when there isn't. Moreover, even though market "go so high" or "are so flat" in the last few years (5 to 10), in the end, their returns average to their risk. They have always done so in the past.
4. Minimize the fees of your broker, mutual fund, advisor. They are here to take your money, most often not to see you make some.
December 19, 2023
Amazone
astonishingly incompetent work
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.
jsr
.......
Author is fixated on flogging strawmen of his own creation
The book spends a whole heck of a lot of time decrying professional money managers, only to then go on to cite "legendary investors" to lend credence to whatever straw man he's flogging at the time. You can't have it both ways.
On one page, fund managers are literally called Chimpanzees with a dartboard,
then we are citing legendary fund manager XYZ on the next page,
and then he goes down the rabbit hole of characterizing Warren Buffett and Peter Lynch as "lucky".
Do not waste your time or money on this poorly constructed, dated book.
nathan
.......
Dangerous
Good historical data and an excellent discussion of the superiority of index funds make this book a worthwhile purchase. However, if you intend to blindly follow Bernstein's investment strategy - which lacks a deeper understanding of the importance of investment valuation and market timing - you stand to lose a great deal of money in the next ten years.
Before implementing Bernstein's strategy, ask yourself just one question:
"Am I aware of the statistical correlation between the market's price-to-earnings multiple and the market's return in the subsequent 10 years?"
If not, you may want to read Bull's Eye Investing by John Mauldin or Irrational Exuberance by Robert Shiller - two of the most revealing and honest investment books ever written.
Bernstein's strategy, notwithstanding its emphasis on low-cost index funds, will fail if the investor ignores market valuation levels.
An index fund is useless if the index is grossly overvalued to begin with.
Please, it is in your own best interest to get a grasp of valuation principles before using Bernstein's investment strategy.
Take note of investment master Warren Buffett's repeated warnings that stocks are extremely overvalued. Using an index fund does not nullify this fact.
GC Fourie
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