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on January 23, 2004
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.
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on September 30, 2003
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.
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on February 12, 2004
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!
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on March 2, 2010
The Four Pillars provides an excellent foundation for people wanting to invest for their retirement.

I would suggest that he might have added a fifth pillar, taxation, or the tax environment, as being critical, although he does stress it as important when deciding upon which investments to select. My thinking is that the book was written for an American audience, and therefore the tax environment was perceived as being somewhat static.

He notes in the foreword that this book is a secondary effort, his first having been too mathematically based to have been readable by the average investor. He has done an excellent job in that.

Given how badly our markets have tanked in the last few years, he could have placed more emphasis on being brave, and buying into the market when it crashes. He does get into this with his focus on "portfolio rebalancing," but I am not certain that he makes the point with the reader as to how critical this is.

I am certain that a new edition would include more emphasis on international investing, given the behemoth that China is becoming. I will buy an update when it comes out.
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on January 3, 2004
I began seriously investing in stocks and bonds about three years ago. Since that time, I've read perhaps a dozen books on investing. This is my favorite. It has all the elements a beginning investor needs: clear explanations of basic investing concepts; lucid and entertaining prose; a brief history of the market to illustrate for the reader both the manias and extreme pessimism that have sometimes gripped it; and, most importantly, numerous cautionary tales about the industry that helps beginners make their investment choices.
Bernstein identifies four pillars for building a portfolio: theory, history, psychology and the business. The pillar of theory is about the conceptual framework of investing. This potentially could have been a very difficult section, but Bernstein makes it very readable even though he introduces a couple of ideas he claims most brokers are not familiar with. The second pillar of history is about how markets in the West have behaved in the past. Bernstein argues this history is important to remember so that investors develop reasonable expectations for what their investment will do and recognize both the warning signs of an overheated market or the symptoms of a depressed one.
The third pillar of psychology helps the reader to combat the usual mistakes beginning investors make: excessive trading, following hot stocks and funds, high fees, overconfidence, etc. Bernstein says the investor must learn to emotionally detach him- or herself from the investing crowd while still keeping a healthy respect for all he doesn't know. The fourth pillar of business emphasizes that those who provide investment services for you are often your worst enemy to getting a decent return on your money
This is a great book, but not a perfect one. I wish Bernstein had explained some things more fully - especially in the first section of the book on theory. But what he does explain, he explains well enough to catapult the reader to the next level of understanding, should he or she choose to go there. Some critics of the book might argue that Bernstein says nothing new. This is true. But the effectiveness of the book is in the way it is presented and how it is written. I recently read John Bogle's book "Common Sense on Mutual Funds". It is a superb book, and has many (but not all) of the same points as "The Four Pillars of Investing". But it fails to engage the reader as well as this book does.
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on October 3, 2003
1. Risk and return go hand in hand:
No matter what type of investment you make, "you are rewarded mainly for your exposure to one thing - its risk... The biggest risk of all is failing to diversify properly."
2. Learn from history:
Sometimes the investing public loses perspective, and becomes either unjustifiably positive or negative. Any investor who does not understand history is operating with a significant handicap, and the book offers a primer on financial history.
3. Human nature can lead you astray:
Unless you become aware of - and resistant to - these common flaws, human nature suggests you will have a tendency to: pay too much for some types of stocks, trade too much, tend to be overconfident, and "regularly make irrational buy and sell decisions."
4. "You are locked in a life-and-death struggle with the investment industry":
Financial services companies exist "almost entirely for one purpose: the extraction of fees and commissions from the investing public." Furthermore, the author argues that the industry "operates at a level of educational, moral, and ethical imperatives that would be inconceivable in any other industry."
5. Figure out what you are going to need, then devise a strategy to get there:
Based on the four "pillars" outlined above, the author presents a series of steps designed to help you calculate how much you will need to save to meet your goals, and how to design and manage your financial portfolio so that it takes you where you want to go. "With relatively little effort," concludes the author, "You can design and assemble an investment portfolio that, because of its wide diversification and minimal expense, will prove superior to most professionally managed accounts."
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on August 3, 2003
I won't be able to say anything that hasn't been said before, but this is really a good read on passive index investing strategy and market history. I found this to be good companion book to Larry Swedroe's Rational_Investing_In_Irrational_Times. This book covers market history, efficient market theory, statistics on actively manged funds vs. passive vehicles, and detailed information on how and why diversified portfolios work the way they do. I think the biggest hurdle people will have following the passive index strategy is having the guts to stick out bad markets and putting money into lagging asset classes by taking money from your winners.
Overall the critics are largely irrelevant (re: people who point out Warren Buffet). Although Bernstein presents a fairly weak argument in his book about the success of value investors such as Buffet, I still think the core of the book stands on it's own.
I like Warren Buffet's writings and investment style as much as the next person (and even own a few shares), but he really isn't running a "mutual fund" as people sometimes think. He runs a conglomerate that purchases good businesses that largely run themselves and hands money off to him as profit. This is a great business model, but significantly different from where Berkshire started decades ago. Of course most of these deals come to him because he is Warren Buffet and this gives him a decided advantage over the individual investor. I think in the end the efficient market theorists will be shown correct. I'd like to think that somewhere out there people are beating the market hand over fist continuously, but this is becoming harder and harder to do as an external investor buying stocks. Buffet's advantage over the recent past hasn't been his stock prowess but the fact that he owns the companies and has control over their destiny and cashflow.
Regardless, this book is a great read for anyone interested in protecting their money and beating virtually all money managers with minimal stress.
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on July 6, 2003
I enjoyed this book by William Berstein. The fact that John Bogle selected The Four Pillars of Investing: Lessons for Building A Winning Portfolio as the best investment book for 2002, I unhesitantly went out, bough it and absorbed it.
Some of the key points are:
The Art and Science of mixing different asset classes into an effective blend.
The dangers of actively picking stocks, as opposed to investing in the whole market.
Behavorial finance and how state of mind can adversely affect decision making.
Why the mutual fund and brokerage industries instead of being your partners, are often your most direct competitors.
Strategies for managing all of your assets---savings, 401 (k)s,
home equity --- as one portfolio.
William Bernstein says it best; "The overarching message of this book is at once powerful and simple: With relatively little effort, you can design and assemble an investment portfolio that, because of it's wide diversification and minimal expence, will proove superior to most professionally m managed accounts. Great intelligence and good luck are not required. The essential characteristics of the succcessful investor are the discipline and stamina...stay the course."
Investing is a journey not a destination lined with stockbrokers, journalists, and mutual fund companies whose interests are diametrically opposed to yours. The Four Pillars of Investing shows you how to ignore distractions, stay the course, and determine your own financial direction with the sole goal of building long-term wealth for yourself and your family.
The Four Pillars of Investing provides an easy, step by step program for achieving long-term investing success. Highly recommended.
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on June 17, 2003
William Bernstein once again makes his case for indexing and throws in a good story along the way. There is a lot to like about this book and the historical section in particular is interesting and unique in investment literature. Bernstein traces much of the performance of the last twenty years back to a sort of backlash to the deflation of the depression years and notes the troubles in coming off the gold standard in the early twentieth century. True to current investment themes he offers yet another estimate for long term future returns (lower of course). One of a cast of thousands. I am not convinced by the case he has made for indexing only. Not that I think indexing is a bad way to go (it may be the only way to go) but this book does not prove the superiority of indexing. It does provide a strong case for it however. Indexing is a great way to proceed for the monies we must have in the future. It is interesting to note that the literature from Tweedy Browne takes exactly the opposite side of the equation. Lately I have noticed this tendency in several investing books/resources. For instance Bernstein notes that there is no reason to expect a money manager that beats the market over a five year period to continue to do so. Tweedy Browne notes that there is no reason a priori to expect a money manager not to continue to do so. What is interesting is that this amounts to saying that the ability to beat the market is essentially random. This of course agrees with the vast majority of evidence. For the average investor (and most people are average investors) the indexing method is best by far. This probably includes most people that consider themselves day traders. Bernstein does point out that most professional money managers use indexing for their personal portfolios regardless of what they recommend to their clients. However, I am not sure if this phenomenon has been objectively studied. The bottom line is that indexing does reduce the probability that the individual investor will be eating Alpo in his/her old age. But indexing also reduces the probability that the elderly investor will be eating caviar as well. Bernstein knows this and goes out of his way to point it out. That being said the best approach may be to index most of the money and have some set aside for stock picking or active management thereby partaking of the best of both worlds. Berstein also uses the same black magic for establishing the model portfolios that he used in The Intelligent Asset Allocator. Once again, asset allocation is shown to be as much an art as a science. Whatever turns out to be true the reader will find this to be an interesting, generally well reasoned book.
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on June 12, 2003
Bernstein has written an excellent book, but, despite what he says, he is not really an efficient market advocate. In standard economic terminology, a financial market is efficient if it satisfies two conditions. First, the price must be right. In other words, the price of the market index must fully and correctly reflect all relevant information. That is, the set of investors in the market must have an accurate knowledge of the mean and variance of the expected return of the market, and the discount rate must be reasonable as well. The second condition is that there must be no free lunch. In other words, the investors in the market, must, on average, be unable to beat the market on a risk-adjusted basis by investing in a subset of the market.
Bernstein clearly believes the second proposition but not the first one, and he is therefore a behavioralist and not an efficient marketeer. Then why does he stress market efficiency at every turn? Probably because he knows that if he doesn't, many of his readers will try to exploit market inefficiency and will wind up impoverishing themselves. He knows the central paradox of investing: Even though the market is inefficient in terms of condition 1(remember the bubble of 2000), most investors would be better off if they acted as if the market were efficient.
On the whole, his advice is good. Use index funds, trade as little as possible, pick an asset allocation based on your individual risk tolerance and stick with it, and, crucially, rebalance periodically. This is sound advice, straight out of academic financial economics.
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