291 of 299 people found the following review helpful
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.
174 of 179 people found the following review helpful
on May 11, 2002
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.
98 of 100 people found the following review helpful
on January 22, 2006
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.
63 of 66 people found the following review helpful
on January 2, 2003
Bernstein's advice is to take a long step back from the daily market reports and concentrate on understanding how the markets work, the 'four pillars', and design your own investment strategy. Bernstein persuades us that with relatively little effort we can build an investment portfolio that is diversified, minimally expensive, and superior to most professionally managed accounts. An ability to estimate the long term return of the major asset classes is a critical skill. Failing to diversify across those asset classes is an investor's biggest risk. Students of modern portfolio theory (MPT) will find FOUR PILLARS to be a companion volume to Larry E. Swedroe's RATIONAL INVESTING IN IRRATIONAL TIMES. The markets are "brutally efficient". Avoid actively managed funds and use index funds to tap into the "collective wisdom" of the market. Market timing, stock-picking, and technical analysis don't work. Indexed securities may be a little dull, but the strategy outperforms the gurus. The first 'pillar' of the book is devoted to investment theory and historical returns of various asset classes. It's the longest section and some of the best material is here. In "Measuring the Beast" there is the the clearest explanation I have read of the dividend discount model (DDM) that is used to determine 'fair value'. This chapter also gives us the Gordon Equation to estimate market returns (Market Return = Dividend Yield + Dividend Growth Rate). Bernstein's conclusions are unsettling: The return of stocks and bonds will likely be similar in the future and their rates of return will probably be lower than in the past. There is no question that having an historical perspective on investment manias and crashes is an important second pillar of understanding for the informed investor. This history has been told before, but the material fits nicely. Bernstein's third pillar analyzes the behavioral errors investors routinely make. A need for excitement (viz. investors drawn towards low-probability/high-payoff situations) and a fundamental misunderstanding of risk/reward that leads investors to conclude that "great" companies must be winning stocks are just two errors that stand out. The fourth pillar of Bernstein's work is his shakiest. His caricature of the investment establishment that includes the brokerage community, mutual fund companies, and the media is painted with broad angry strokes. He is simply incorrect to say that brokers have no fiduciary responsibility towards their clients (It is required by the National Association of Security Dealers, NASD). On the other hand, his incisive analysis of the 401(k) retirement system is an important alarm. Bernstein's closing chapters address some of the big questions investors ask. His "back of the envelope" calculation for retirement nest eggs is as helpful as discovering a Leatherman Tool in your back-pocket. In a variety of investment scenarios the author ably demonstrates the application of his ideas in a specific and flexible manner. But it is fair to say that a typical portfolio will include US and foreign index equity assets with an emphasis on value (versus growth), short maturity bonds, and a real estate index fund. Serious investors will want to read this book.
32 of 33 people found the following review helpful
on May 13, 2006
After twenty five years of following Lynch, I graduated to Bernstein.
ONE UP ON WALL STREET by Peter Lynch, who was famous for beating the market with his Fidelity Magellan Fund in the 1970's and '80's.
He argued that common investors could beat Wall Street professionals by holding individual stocks instead of mutual funds, and by watching everyday things around them. For example, he said when he noticed his wife and daughters bringing home fist-sized plastic eggs with panty hose in them, he found out who was making the so-called LLEGS, then bought shares of the company and made a bundle.
He advised readers to "water the flowers and kill the weeds," not the other way around, a trap most beginning investors fall into. People hate to sell losers so they hang on much too long, while selling the stocks that have done well to lock in small profits, thereby forgoing much larger profits if they had let the stocks run. He spawned a whole generation of amateur investors in search of the elusive "10-baggers", Lynch's term for stocks that increased ten-fold from their purchase price.
This book affected my investing philosophy for almost 20 years. It served me well in the 1990's because I was in the information technology business and invested heavily in this segment. Unfortunately the Internet Boom brought down all the tech stocks starting in 2000, so the Lynch strategy was devastating for my portfolio from 2000 to 2004.
Starting in 2005 I diversified into a combination of asset classes that more or less match the global market, including large cap, mid-cap, and small cap stocks, international stocks, bonds/preferred stocks, REITs, and gold. A little bit of segment specialties are thrown in like commodity hedge and energy, both oil and new energy sources such as solar and wind. I still speculate on 5% of my portfolio with individual stocks, but everything else is in electronically traded funds (ETF's) or individual bonds. I don't believe in bond funds, since they don't guarantee principal like individual bonds.
The best book I have found on the wisdom of asset allocation and indexing the market instead of investing in individual stocks or high-priced managed mutual funds is THE FOUR PILLARS OF INVESTMENT: LESSONS FOR BUILDING A WINNING PORTFOLIO, by William Bernstein, This book is one of the top-5 recommended investment books by the Wall Street Journal's Jonathan Clements, and the book that legend John C. Bogle, founder of The Vanguard Group, says he wish he had written. I recommend this 2002 book MUCH MORE highly than Peter Lynch's 1970's book.
Following the advice of THE FOUR PILLARS, you won't beat market, but nobody really does this anyway long-term. Bernstein proves it statistically, and even shows Peter Lynch could not sustain his Magellan record over the long term. But the good news is that you won't lose your shirt and you will always do as well as the overall market, which goes up given enough time. When one asset class gets clobbered, you can sleep well knowing that one of your other asset classes is doing well to make up for the one that is suffering. Reallocate once a year but don't try to time the market, which leads to high transaction fees and ultimately to lower returns.
And stay away from high priced brokers. Bernstein also warns about newsletter gurus, who cannot beat the market but zap your your portfolio with subscription fees. Be content with 6% to 8% for your total portfolio instead of gambling to get 15%+ and then ending up with -30% or worse. I got greedy and paid the price in the 1990's.
Good luck with your own portfolio.
David Marshall, Marshall Books, [...]
28 of 29 people found the following review helpful
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.
120 of 139 people found the following review helpful
on April 3, 2005
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.
29 of 31 people found the following review helpful
on July 23, 2002
A number of reviewers comment on Bernstein's aversion to active managers.
This is a point which has been demonstrated again and again in the financial literature. See especially 'A Random Walk Down Wall Street' by Burton Malkiel and both books by John Bogle. Although some managers, historically, outperform, they are not the same managers who outperform in the future. This has been demonstrated again and again with different sample periods and different data: it is the dirty secret of the investment management industry, that the rational investor would choose the low fee option.
In the institutional pension fund (defined benefit) market, where fees are *much* lower and sophisticated consultants advise the trustees, you would expect it to be much easier to select good active managers. The reality, which Bernstein addresses, is that institutional pension funds make *more* use of passive or indexed funds, than individuals do.
Bernstein's book brilliantly summarises the main points about investing for the individual investor today:
1. stock returns are likely to be a lot lower in the future, than in the past
2. fees on funds are going to be a very important influence on final returns (1 or 2% of 7% annualised returns hurts a lot more than of 13% annualised returns)
3. since it is impossible to know (in advance) who the superior fund managers are going to be, it is better to lodge the majority of money in index funds, which will provide a return, long run average, better than 2/3rds of money managers, at a far cheaper cost
But the book is much subtler and deeper than this. It looks at how we get 'valuation bubbles' like the recent dot-com/ telecoms boom, and how humans consistently make investment mistakes for deep seated psychological reasons. It helps you to look sceptically at a financial 'advice' industry, that is really there to make a living off your hard earned savings.
Bernstein's bias is towards value investing and he correctly points out that it is possible to pursue this investing style using 'value tilted' index funds, with low fees. Although value as a style has massively outperformed growth over the last 3 years (to the tune of 40% aggregate), it is still a point worth taking in. When stocks in general are expensive (as they still are on any quantitative basis), cheap stocks can still be the way to go.
Reading this book, along with David Chilton's 'The Wealthy Barber' and the books by Burton Malkiel and John Bogle, is likely to be among the most rewarding things you can do for your personal wealth, long term.
15 of 15 people found the following review helpful
on May 16, 2002
William Bernstein's new book, The Four Pillars of Investing, has been eagerly anticipated by readers of his first book - The Intelligent Asset Allocator. I think that readers of The Four Pillars will be just as happy as they were with the first book.
Bernstein, together with a number of financial writers including Larry Swedroe and John Bogle, have written passionately about the merits of disregarding most of the preachings of the financial media and marketers and instead urge readers to take a sensible, rather than emotional, approach to investing. In an easily readable style understandable by most anyone, The Four Pillars provides an outstanding overview of basic concepts of risk in projecting portfolio returns and in explaining why so many investors spend so much money for worthless investing advice and management.
The Four Pillars does a wonderful job of explaining the axiomatic principle that anticipated returns are related to the risk of an investment. I've found that Bernstein's greatest strength is that he is able to explain the mathematical and statistical underpinnings of investment theory in a way that most readers can understand. His writing is not overly technical and the book was a joy to read. Bernstein's discussion on the underlying reasons that actively managed mutual funds, stock picking and market timing only generate high costs and poor performance is excellent and quite convincing.
I thought the book did a particularly good job of describing the mental factors involved in a long term investing strategy. The book was written after the technology crash and the events of 9/11 and draws on these events to explain the type of mental anguish which investors must anticipate over the course of a long term plan. Unlike many investment writers who simply advocate investment in equities because they historically have done better over the long term, Bernstein takes pains to advocate a diversified portfolio tailored to the investor's level of risk tolerance so that an investor can stay the course through thick and thin.
For people who believe that they have a unique ability to actively trade their way to market beating returns - read this book and it will change your life.
15 of 15 people found the following review helpful
This book is not designed for people who are trying to figure out how to make short-term profits. As the title says, this book gives you advice on building a long-term portfolio. And Bernstein stresses some main points: invest in index funds; diversify; keep costs low; rebalance regularly; tune out market noise; and stay the course.
The information in this book is generally not complicated, and there is little math involved. The content is easy to understand, even if you are a relative newcomer to investing. He does a nice job of explaining the value bias, which states great companies often don't make great stocks. He also spends a chapter on the Dividend Discount Model, which is a fairly accurate method of determining future returns. And he has a chart in the book which gives estimated returns for various asset classes for the next few decades (hint: diversify into small, value, REIT).
If you have read books by John Bogle or Larry Swedroe, you probably already know the main themes of this book. But if you have not, I would recommend this as a great way to learn about long-term investing.