I recently finished reading The Four Pillars of Investing – Lessons for Building a Winning Portfolio – by William Bernstein.
As the title suggests, the author presents within this book four essential pillars of successful investing. Each section of the book is then dedicated to investigating and detailing each of these pillars and they are: 1) Theory 2) History 3) Psychology and 4) Business. The first section on theory, is one which the author calls “the most important part of the book”. In his words it “surveys the awesome body of theory and data relevant to everyday investing”. This section centers itself around the “fundamental characteristic of any investment is that its return and risk go hand in hand.” The second section on History postulates that “an understanding of financial history provides an additional dimension of expertise.” The third section, Psychology, is one in which the author surveys the area of “behavioral finance”. Where one “learns how to avoid the most common behavioral mistakes and to confront your own dysfunctional investment behavior.” Last but not least the last section – Business – exposes how “the modern financial services industry is designed solely to serve itself.”
What sets this book apart from other investing books is the breadth of areas covered, and also the writing style which is both “understandable and entertaining”. A highly recommended read for any investor regardless of level.
Below are key excerpts from the book, that I found particularly insightful:
1) “The highest returns are obtained by shouldering prudent risk when things look the bleakest.”
2) “Most small investors naturally assume that good companies are good stocks, when the opposite is usually true.”
3) “Sine you cannot successfully time the market or select individual stocks, asset allocation should be the major focus of your investment strategy. because it is the only factor affecting your investment risk and return that you can control.”
4) “Bubbles occur whenever investors begin buying stocks simply because they have been going up.”
5) “Buying assets that everyone else has been running from takes more fortitude than most investors can manage. But if you are equal to the task, you will be rewarded.”
6) “There are really two behavioral errors operating in the overconfidence playground. The first is the “compartmentalization” of success and failure. We tend to remember those activities, or areas of our portfolios, in which we succeeded an forget about those areas where we didn’t…The second is that its far more agreeable to ascribe success to skill than to luck.”
7) “By indexing, you are tapping into the most powerful intelligence in the world of finance – the collective wisdom of the market itself.”
8) “Rebalancing forces you to be a contrarian – someone who does the opposite of what everyone else is doing. Financial contrarians tend to be wealthier than folks who like to simply follow the crowd.”
9) “Risk and return are inextricably enmeshed. Do not expect high returns without frightening risks, and if you desire safety, you must accept low returns.”
10) “This book should be seen as a framework to which you’ll be continuously adding knowledge.”
11) “The overarching message of this book is at once powerful and simple: 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.”