Friday, August 30, 2013

Four Pillars

There are many investment charlatans out in the wider world. Dr. William Bernstein, a financial wizard (and neurosurgeon now retired) is anything but. I've read several of his books, and here is a summary/condensation of one of his best, The Four Pillars of Investing:

PILLAR ONE--Investment Theory:

"Anyone promising high returns with low risk is guilty of fraud."

"The long-term return of high-grade bonds is essentially the same as the dividend yield."

"The market is brutally efficient and can be thought of as being smarter than even its wisest individual participants."

"Stock picking and market timing are expensive, risky, and ultimately futile excercises."

"A prudent course is to make the broad market and a lesser amount of small U.S. and large foreign stocks your core stock holdings."

"Financial history provides us with invaluable wisdom about the nature of the capital markets and of returns on securities."

"No one--not the pundits from the big brokerage firms, not the newsletter writers, not the mutual fund managers, and certainly not your broker--can predict where the market will go tomorrow or next year."

"From the market peak in September 1929 to the bottom in July 1932, the market lost an astonishing 83%."

"The message to the average investor is brutally clear: expect at least one, and perhaps two, very severe bear markets during your investment career."

"Most investors are simply not capable of withstanding the vicissitudes of an all-stock invesment strategy."

"A young person saving for retirement should get down on his knees and pray for a market crash, so that he can purchase his nest egg at fire sale prices."

"For the 50 years from 1932 to 1981, Treasury bonds returned just 2.95% per year."

"The fundamental investment choice faced by any individual is the overall stock/bond mix."

"Alfred Cowles was directly responsible for the collection and analysis of most of the nation's stock and bond data from 1871 to 1930. Without Cowles, we would still be financial cave dwellers.

PILLAR TWO--Investment History

"Be aware that the markets make regular trips to the loony bin in both directions."

"There is nothing new--only the history you haven't read (Larry Swedroe quote)"

"In no field is a grasp of the past as fundamental to success as in finance."

"Bubbles occur whenever investors begin buying stocks simply because they have been going up."

"At times of great optimism, future returns are lowest; when things look bleakest, future returns are highest."

PILLAR THREE--The Psychology of Investing:

"The biggest obsticle to your investment success is staring out at you from your mirror."

"Overconfidence is probably the most important of financial behavioral errors."

"The next major error that investors make is the assumption that the immediate past is predictive of the long-term future."

"Human beings are not very good at taking losses or admitting failure."

"My experience is that the wealthier the client, the more likely he is to be badly abused (by his broker)."

"The most liberating aspect of an indexed approach is recognizing that by obtaining the market return, you can beat the overwhelming majority of investment professionals who are trying to exceed it."

"A superior portfolio strategy should be intrinsically boring."

"If you cannot hold onto the asset class mutts in your portfolio, you will fail. Your overall portfolio return is all that matters."

PILLAR FOUR--The Business of Investing

"Make no mistake about it, you are engaged in a brutal zero-sum contest with the financial industry.--every penny of commissions, fees, and transactional cost they extract is irretrievably lost to you."

"99% of what you read in and hear from the financial media is, in fact, advertising cloaked as journalism."

"It is a sad fact that you can pass the Series 7 exam and begin to manage other people's accumulated life savings faster than you can get a manicurist's license in most states."

"Stay clear of mutual funds and variable annuities with sales loads and fees."

"Vanguard became the first, and only, truly 'mutual' fund company owned by its shareholders. There was, therefore, no incentive to milk the investors, as generally happened in the rest of the investment industry."

"At the present time, I'd still give the nod to the more traditional open-ended index funds (over ETFs)."

"When you buy the market, you are hiring the aggregate judgment of the most brilliant and well-informed minds in finance."

"The stockbroker services his clients in the same way that Bonnie and Clyde serviced banks."

"The essential characteristics of the successful investor are the discipline and stamina to, in the words of John Bogle, 'stay the course'."

"With relatively little effort, 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."

It took me twenty-plus years to figure out the truths William Bernstein imparts above. Unfortunately, I'm a slow learner.

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