Non-fiction 28 Jul 2006 17:16
The Four Pillars of Investing
The Four Pillars of Investing
William Bernstein
For those interested in investing for the long term and, as the author puts it, not dying poor (and everyone should be), this book is an essential resource. It will teach you to evaluate the value of investment options and their expected returns, how to spread your money so as to take in the advantages of a proper diversification (and to deal with the disadvantages of a proper diversification — it works whether you want it or not) and, most important of all, to realize that the market is much, much smarter than you.
The author follows very much the line of Burton Malkiel’s Random Walk Down Wall Street, but this book seems to have a better foundation. He also stresses the importance of investing in index funds, and points the reader towards Vanguard as a great example of a customer-centric fund manager, but he steers the reader towards a proper portfolio allocation based on his/her current situation; this will mean not only a broad stock index fund, but potentially foreign stock, real estate investment trusts etc. Note that the book is very much US-centric; if you are outside the USA, you will have to adapt his portfolio to your local conditions. Vanguard, in particular, is not available in most of the world.
Much of the advice in the book goes against normal human instincts, but it makes sense when you think about it (and when you follow the author’s explanations). For example, when a stock has gone up recently, it’s not a good time to buy: a high price necessarily indicates a lower expected return. For the same reason, the best thing that can happen to a young investor is a generalised market crash: prices will be low and future returns will be high. You don’t see many investors hoping for crashes, though.
For the record, the four pillars are the theory of investing, the history of investing, the psychology of investing and the business of investing. Trust me, your broker doesn’t want you to read about the last pillar. Any investor who doesn’t want to rely on his/her luck to have enough money to retire safely should, though.
