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The Four Pillars of Investing: Lessons for Building a Winning Portfolio, by William J. Bernstein
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The classic guide to constructing a solid portfolio―without a financial advisor!
“With relatively little effort, you can design and assemble an investment portfolio that, because of its wide diversification and minimal expenses, will prove superior to the most professionally managed accounts. Great intelligence and good luck are not required.”
William Bernstein’s commonsense approach to portfolio construction has served investors well during the past turbulent decade―and it’s what made The Four Pillars of Investing an instant classic when it was first published nearly a decade ago.
This down-to-earth book lays out in easy-to-understand prose the four essential topics that every investor must master: the relationship of risk and reward, the history of the market, the psychology of the investor and the market, and the folly of taking financial advice from investment salespeople.
Bernstein pulls back the curtain to reveal what really goes on in today’s financial industry as he outlines a simple program for building wealth while controlling risk. Straightforward in its presentation and generous in its real-life examples, The Four Pillars of Investing presents a no-nonsense discussion of:
- 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
- Behavioral finance and how state of mind can adversely affect decision making
- Reasons the mutual fund and brokerage industries, rather than your partners, are often your most direct competitors
- Strategies for managing all of your assets―savings, 401(k)s, home equity―as one portfolio
Investing is not a destination. It is a journey, and along the way are stockbrokers, journalists, and mutual fund companies whose interests are diametrically opposed to yours.
More relevant today than ever, The Four Pillars of Investing shows you how to determine your own financial direction and assemble an investment program with the sole goal of building long-term wealth for you and your family.
- Sales Rank: #19114 in Books
- Brand: Bernstein, William J.
- Published on: 2010-07-08
- Original language: English
- Number of items: 1
- Dimensions: 9.30" h x 1.10" w x 6.10" l, 1.41 pounds
- Binding: Hardcover
- 352 pages
From the Back Cover
Since its initial publication, The Four Pillars of Investing has become a staple for the independent-minded investor looking to make better-informed investment decisions. Written by noted financial expert and neurologist William Bernstein, this time-honored investing guide provides the knowledge and tools for achieving long-term profitability.
Bernstein bridges the four fundamental topics successful investors use to generate exceptional profits on a consistent basis:
- The Theory of Investing: “Do not expect high returns without risks.”
- The History of Investing: “About once every generation, the markets go barking mad. If you are unprepared, you are sure to fail.”
- The Psychology of Investing: “Identify the era’s conventional wisdom and assume that it is wrong. More often than not, it is.”
- The Business of Investing: “The stockbroker services his clients in the same way that Bonnie and Clyde serviced banks.”
From the essential soundness of classic portfolio theory through the inherent wisdom of investing in multiple asset classes, The Four Pillars of Investing provides a distinctive blend of market history, investing theory, and behavioral finance to help you become a successful, self-sufficient investor.
About the Author
William J. Bernstein, Ph.D., M.D., is a neurologist and the cofounder of the investment management firm Efficient Frontier Advisors. He is the author of three finance books―The Intelligent Asset Allocator, The Four Pillars of Investing, and The Investor’s Manifesto―and two volumes of economic history, The Birth of Plenty and A Splendid Exchange. Bernstein is currently working on a history book exploring the effects of access to technology on human relations and politics.
Most helpful customer reviews
296 of 305 people found the following review helpful.
Win by not losing.
By Thomas Mongle
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.
183 of 188 people found the following review helpful.
The most important investment book you'll ever read
By R. Love
Right up front, I read Bernstein's first book and thought it was a classic. However, it wasn't a huge market success which the author admits for many reasons but it was/is still a fine book (The Intelligent Asset Allocator).
Now Bernstein comes back with an even better book from the standpoint of being readable for just about any kind or type of investor, experienced or inexperienced. The math and the charts are still there but with less rigorous emphasis. ...
The Four Pillars of Investing is both a historical review of investment success and failure with a very honest discussion of risk and reward. The pillars are the theory of investing, the history of investing, the psychology of investing (which is now recognized as a critical component in understanding why we invest the way we do) and finally, the business of investing. BTW, the humor in many of these chapters has not been lost either. I don't think your favorite stock broker or investment pro is necessarily going to enthusiastically recommend that you read this book.
Much of what is in the new book should be almost automatic wisdom/rules for investors but as we all know, we usually stray far and wide from good advice and common sense. In this post high-tech bubble collapse period, some solid review of investment principles is necessary. Call it back to basics if you will. It's just that Bernstein backs it up with the data to prove his points.
What really makes this book different from the first book (for me personally) is that Bernstein has finally put the portfolio construction recipe on paper in Chapter 13 called Defining Your Mix.
And now a special message to parents of high school and college graduates: buy them a copy of this book. Don't worry if they don't read it now. Or if they look at you strangely. For those that do read it, they'll be ten to twenty years ahead of their peers in investment wisdom and hopefully, financial security. And that's really what this book is all about; not how to trade or gamble on market timing but rather on how to use sound principles of investing to manage/understand risk while builiding a solid foundation of assets for the longer term.
112 of 114 people found the following review helpful.
Best Investment Book I ever Read
By Professional Investor
I'm a hedge fund manager, treasurer of the board of a small college, and head of the school's investment committee. I also manage my own personal portfolio. I have a fair amount of experience in the investment arena across many areas.
This is the best single book I have ever read regarding investments for tax paying individuals of any economic level. I buy them by the case and give them away to anyone who asks me for advice. All of my family has one! If you take the time to read this book throughly and implement an investment plan based upon Bernstein's recommendations there is a high probability you will do far far better than if you try to do things yourself or use any sort of financial professional as an advisor.
I am always amazed how people will take years if not decades to amass some personal wealth and then not be willing to put 40 hours or so into understanding how to invest it. The "financial industry" will be happy to do that for you usually at a cost of 2% to 2.5% per year. If you have a 40 year investment period, you could DOUBLE the amount you'll have at retirement simply by avoiding the annual 2.5% fees!
Most of the reviewers who criticized this book miss the following key points:
- Taxes matter. Alot. Almost all of the data presented by the financial industry is on a pre-tax basis. Private individuals exist primarily in a after-tax world.
- Sure institutions may do things differently. They don't pay taxes. If you move things around frequently, taxes will end up being your biggest single expense. Expenses are death to the success of any long-term investment program.
- Warren Buffet, David Swensen (Head of Yale's endowment) and Jack Meyer (Former head of Harvard's endowment, just left this summer) are regarded as 3 of the top investment professionals of our time. They ALL recommend that individuals use index funds. Without their resources (highly educated staffs, access to data and research individuals can only dream of, the ability to negotiate special deals due to the size of their investments, and access to opportunities which are limited to a select few) you simply have no realistic chance of picking top tier investments across many sectors where you need to pcik teh top 15% to beat the index fund approach. It is naive to think that by sitting with your PC at home several hours a week you can be in the top 15% of investors on an after-tax basis in many sectors over a long time period.
- If you use index funds, over time, you'll beat 85% to 90% of the professionals in any investment sector. That means you'll be in the top 10% to 15% of all investors. If you factor in the effects of having a diversified portfolio (all with top 15% investments), your overall portfolio will likely put you in the top 5% of investors.
Buy this book. Read it. Understand it. If you follow it basic tenets (low cost investing, long-term horizon, rebalance regularly, avoid fees and taxes) it will be the single most important financial decision you will make it your life. Best of all, after the initial learning period, it's simple to do and only takes a few hours per year.
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