The Four Pillars of Investing: Lessons for Building a Winning Portfolio [Hardcover]

William Bernstein, market historian, scholar, and strategist, writes this new book with the confidence of his experience and the courage of his convictions, just as he did in his earlier "The Intelligent Asset Allocator." The work is an expansion on the theme that you cannot beat the market by timing or hiring active professional fund managers, so allocate, sit back, and enjoy the long-term ride. His advice is equally applicable to the novice as well as the veteran investor. You get a short course on what market returns you should expect, why you cannot beat the market, why the professionals can't help you, and how to set up your own portfolio using index funds. In other words, he has no use for the investment business other than the index funds it produces.
Chapter 5 on Manias is an excellent history of economic progress, and obviously the groundwork that led to his soon-to-be-published "The Birth of Plenty" (mid-2004) on the origins of the West's affluence. I particularly appreciated his credit to Hyman Minsky on the pattern of bubbles. Although Kindleberger has covered much of the same ground and with greater visibility in the press, Minsky's contributions are more insightful to understanding the distinct nature of economic manias.
Another interesting tidbit is his portrayal of technology as being, in general, a bad business endeavor. Bill Fleckenstein has made this point frequently that technology, unlike Buffett's desired "consumer monopoly," is easily outmoded and supplanted with the new, new thing. Let's just be thankful that earlier entrepreneurs took the time and the risk to create progress.
The true worth of the book comes under the heading of "Why investors lose money." This is the cornerstone of Bernstein's philosophy stating that if you can keep from losing, you will win:
(1) Instead of joining the herd mentality, get out when "everybody" knows that something is a good thing. It only means that everyone who wanted to buy already has; there are no buyers left. Prices can only fall.
(2) Overcome overconfidence by checking the performance figures. Few professionals ever "beat the market." Why do you think you can?
(3) Understand that all investments return to the mean, thus past performance is no indication of future performance.
(4) Don't trade for excitement. Look elsewhere for entertainment.
(5) Keep your eye on the long term and don't be panicked out by emotional short term swings.
(6) Realize that there are no "great companies." The 1000+% returns are few and far between.
(7) Accept that the market is random. Therefore don't get fooled into believing patterns repeat. Index funds are the only way to go.
(8) Check your accounting carefully. Don't overstate your successes while forgetting your losses. Keep track of the portfolio's total return.
(9) Don't get taken for a ride by the investment industry. Trust no one.
It gets a little trickier when he begins building portfolios. Using representative stereotypes, he sets up hypothetical investments using US stock index funds made up of large caps, small caps, large value, small value, REITs, plus Foreign securities. The remaining assets should be split up between cash and bonds (long and short). Your results will be dependent on how well you can approximate this theories. Another catch comes with "rebalancing." Bernstein's advice here is also well taken. Sell out a portion of the superior performers to bring your percentages back in line to their desired weigh in the portfolio and re-allocate those funds into the underperformers to bring their numbers up to desired percentages. Regardless of his distain for decision making, this does require skill and action on your part, but Bernstein has given you enough help to get the job done correctly.

This book is for everyone from the novice investor to the most savvy investor. The author does a wonderful job of explaining concepts and ideas without getting caught up in a bunch of analytical data and graphs. I wish this book had been published when I was much younger. All young people justing getting started in the work world should take the time to read this book. It will definitely help you later. Definitely worth the time to read this book!

I am an avid fan of Bernstein and his fellow travelers in the Efficient Frontier, Sharpe, and other innovations of Modern Portfolio Theory, so I was disappointed to see so little of this valuable information included in this book. I understand that this book was meant to be less intimidating to the novice and intermdiate investor alike, and he doesn't disappoint with accessible articulation and a witty style that should appeal to every reader.

The two chapters on asset allocation, the ~one~ thing the investor is able to control, and the one thing which directly rewards the investor, doesn't explain the "frontiers" and why four assets or ten is best for the individual investor. The efficient frontier in layman's terms would have been especially helpful. On the other hand, dauntless pages were dedicated to diminishing returns (DR), which were clearly adumbrated for their importance.

Then Bernstein concentrates on Vanguard investment opportunities, with only brief reference to ETFs (exchange traded funds). Vanguard is to be commended for bringing index-investing to the fore, but Vanguard's steep minimums and stiff penalties are impediments for the smaller investor and are downright subversive to the investor who does not believe in a "buy-and-hold" theory of investing. Many ETFs are more asset specific and can be had without excess cost through a discount broker. I wish Bernstein had discussed the merits and demerits of "buy-and-hold" as opposed to, say the Fabian and other methods of entering and exiting the market on certain MDAs (moving daily averages).

I found Bernstein's lack of mention of mid cap stocks throughout the book puzzling. None of the hypothetical asset allocations in the book have any room for mid caps, which can enhance performance and reduce risk. For Bernstein, there are only large and small market capitalization - no middle capitalization. Also, foreign funds and ETFs of foreign assets (such as EFA for MSCI-EAFE index) are considered important, but get only passing and ambiguous comments. The graphs and tables are helpful for the most part, but many are out of date, and some lacked a marked differentiation in plotting more than one overlap, which made for challenging deciphering.

The writing is effusive and accessible, making it a good introductory book and a refresher for bulls and bears alike. Overall, I found the book to be a tad bit too garrulous, but easy to read and informative . My cavils and criticisms aside, this book is truly one of the best books on investment in print.