Book of the Week: The Four Pillars of Investing

10 Apr 2015

the_four_pillars_of_investing This week I skimmed through The Four Pillars of Investing by William J. Bernstein. There are summaries at the end of each chapter, so it is easy to skim through. This is a good book for people who want to invest. If you already have an index fund portfolio spread among different asset classes, you can skip this book. If you don’t, then after you read this book, you’ll will. The Four Pillars From the back page.

  1. The Theory of Investing - “Do not expect high returns without risks”
  2. The History of Investing - “About once every generation, the markets go barking mad. If you are unprepared, you are sure to fail.”
  3. The Psychology of Investing - “Identify era’s conventional wisdom and assume it is wrong. More often than not, it is.”
  4. The Business of Investing - “The stockbroker services his clients in the same way that Bonnie and Clyde serviced banks.”

It should be painfully apparent by now that most of the investment industry is engaged in nonproductive work. When faced with ironclad data, it takes intellectual honesty in tank-car quantity to admit that you are harming your clients, or that your entire professional life has been for naught. Unfortunately, the investment industry is not known for an abundance of critical self-examination.

Investment Strategy The first pillar tries to explain modern portfolio theory without drowning you in math and statistics. The second pillar tells you what happened before and what is likely to happen again. The third pillar is about how people still screw up. The fourth pillar explains why you are likely getting screwed if you don’t use in low expense ratio index funds. The last section of the book brings all the pillars together and explains how investment strategies work. Your risk tolerance determines the mix of asset classes. The index funds help you reduce expenses and risk. A good point is that although Warren Buffett routinely beats the market, he is an outlier. He is a businessman, not solely an investor. There aren’t that many Warrens in the world.