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62 of 65 people found the following review helpful
5.0 out of 5 stars Pillars of Wisdom, January 2, 2003
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This review is from: The Four Pillars of Investing: Lessons for Building a Winning Portfolio (Hardcover)
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.
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Showing 1-1 of 1 posts in this discussion
Initial post: Oct 11, 2007 8:52:34 PM PDT
Truth Seeker says:
The reviewer misunderstands what is and isn't required of a broker. Certainly, they are required to deal fairly with their clients, but that is not equivalent to a 'fiduciary responsibility'. Look up the definition.
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