The Four Pillars of Investing : Lessons for Building a Winning Portfolio

by William J. Bernstein

book data

106 ratings, 4.18 average rating, 27 reviews (more data...)

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4		34%
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2		3%
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published

April 26th 2002 by McGraw-Hill

details

Hardcover, 240 pages

isbn

0071385290 (isbn13: 9780071385299)

description

Containing sound, sensible advice from a man who has become a hero to frustrated investors everywhere, William Bernstein's The Four Pillars of Investi…more

[close] Containing sound, sensible advice from a man who has become a hero to frustrated investors everywhere, William Bernstein's The Four Pillars of Investing gives people the tools they need to construct top-returning portfolios without the help of a financial adviser. In a relaxed, non-threatening style, Dr. Bernstein provides a distinctive blend of market history, investing theory, and behavioral finance one designed to help every individual become more self-sufficient and make better informed investment decisions. The Four Pillars of Investing explains how any investor can build a solid foundation for investing by focusing on four essential lessons, each building upon the other. Containing all of the tools needed to achieve investing success without the help of a financial advisor it presents practical investing advice based on fascinating history lessons from the market, exercises to determine risk tolerance as an investor, and an easy-to-understand explanation of risk and reward in the capital markets.

William Bernstein has carved out a reputation as one of the most brutally honest, yet consistently accurate, voices in today's financial wilderness. In The Four Pillars of Investing, Dr. Bernstein explains how any independent investor can construct a superior investment portfolio by learning these four essentials:

<UL>
<LI>The Theory of Investing:"Do not expect high returns without risks. "
<LI>The History of Investing :"About once every generation, the markets go barking mad. If you are unprepared, you are sure to fail. "
<LI>The Psychology of Investing:"Identify the era's conventional wisdom and assume that it is wrong. More often than not, it is. "
<li>The Business of Investing:"The stockbroker services his clients in the same way that Bonnie and Clyde serviced banks. "

From the essential soundness of classic portfolio theory through the inherent wisdom of investing in multiple asset classes, The Four Pillars of Investing focuses on the four fundamental topics that every investor must understand and presents an easy-to-follow, step-by-step program for achieving long-term investing success.

William Bernstein's first book - The Intelligent Asset Allocator - remains one of the most honored investment books of recent times. Hailed by national publications, including Business Week, and by independent investment icons, including Vanguard founder John Bogle, it has become a personal finance classic due to its well-researched analyses and rules for successful investing.

Now, in the commonsense investor's guide The Four Pillars of Investing, Bernstein returns with the knowledge and tools investors need to assemble low-risk, winning portfolios without professional advice. This down-to-earth book lays out in easy-to-understand prose the four essential topics that every investor must master - the relationship of risk and reward, the history of the market, the psychology of the investor and the market, and the folly of taking financial advice from investment salespeople. It pulls back the curtain to reveal what really goes on in today's financial industry as it outlines a simple program for building wealth while controlling risk.

Straightforward in its presentation and generous in its real-life examples,The Four Pillars of Investing presents a no-nonsense discussion of:

<ul>
<li>The art and science of mixing different asset classes into an effective blend
<li>The dangers of actively picking stocks, as opposed to investing in the whole market
<li>Behavioral finance and how state of mind can adversely affect decision making
<li>Why the mutual fund and brokerage industries, instead of your partners, are often your most direct competitors
<li>Strategies for managing all of your assets - savings, 401(k)s, home equity - as one portfolio

Investing is not a destination. It is a journey, lined with stockbrokers, journalists, and mutual fund companies whose interests are diametrically opposed to yours. The Four Pillars of Investing shows you how, with relatively little effort, you can determine your own financial direction and assemble an investment program with the sole goal of building long-term wealth for yourself and your family.

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other reviews (showing 1-20 of 213)

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Jul 31, 2007

Mark rated it:

bookshelves: money

Read in January, 2009

Re-reading this in light of the money meltdown.

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One of the best books about investing I've read. By no means the first one you should read, but once you've got some of the basics under control, this helps takes it to a very sensible level. Asset allocation and the history of booms and busts are key here.

Though I just finished it a couple of weeks ago, I'd like to start re-reading it again soon. Very readable and interesting, though I can do without ever hearin...more

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Feb 20, 2010

Chad rated it:

bookshelves: finance, non-fiction

Read in February, 2010

recommended to Chad by: Kurt Kamminga
recommends it for: Investors

An investment adviser and I were talking about the financial books we had read, and he highly recommended this book as the next on my list. I can see why! Instead of immediately offering advice on how to invest, Bernstein takes a step back and makes sure you understand market theory, the history of the markets, the role of psychology in choosing investments, and the very real impact of expenses and the media's influence.

The book contains statistics, tables, graphs, analogies, exampl...more

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Jan 21, 2009

Mark rated it:

Read in April, 2007

This is an extremely practical book on saving and investing. It gives a brief history of investing, going back around 400 years to give a good feel for how risk and return work. It covers the basics of calculating returns, and how to think about money over time. It teaches the simple mechanics of creating an investment plan with several good real life scenarios. Most importantly, it gives insight to how the financial industry and financial media work. The motivations and methods of both are laid...more

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Jun 05, 2008

Mark rated it:

a very good book with lots of good advice about investing with enough technical data to have relevance but written well enough that a novice can understand. He breaks up the fundamentals of investing into four main parts with the last part giving an overall view about how to set up your portfolio. The first part acknowledges that riskier investments will have higher returns over the long haul and safer investments will have lower returns. He scans history for examples and notes that the US is a ...more

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May 22, 2008

Krenzel rated it:

bookshelves: finance

Read in June, 2008

In the introduction to his book, "The Four Pillars of Investing: Lessons for Building a Winning Portfolio," Dr. William Bernstein states that the "competent investor never stops learning." Yet, because the world of investing can be such a confusing place, it sometimes seems that the more you learn, the more confused you get. As a participant on the Bogleheads message board, I feel I am an educated investor but still I often get lost after reading all the different debates:...more In the introduction to his book, "The Four Pillars of Investing: Lessons for Building a Winning Portfolio," Dr. William Bernstein states that the "competent investor never stops learning." Yet, because the world of investing can be such a confusing place, it sometimes seems that the more you learn, the more confused you get. As a participant on the Bogleheads message board, I feel I am an educated investor but still I often get lost after reading all the different debates: Should I invest in total markets or slice and dice my portfolio? Should I invest all my money at once or adopt a dollar cost averaging philosophy? How much foreign exposure should I have? Is now the right time to buy REITs, or do I need them at all? One day, while perusing the message board and sifting through some of these same questions, I found a suggested investing reading list, and this book was listed as the starting point. In this straightforward book, explained with easy-to-understand examples, Dr. Bernstein provides a solid framework for investors to begin to answer some of these questions.

In setting this framework, Dr. Bernstein introduces readers to four basic concepts, or what he terms the four pillars of investing: the theory, history, psychology, and business of investing. The first pillar, the theory of investing, gets most of his attention, as it comprises the first 100 pages of the book and explains how the bond and stock markets work. In this section, Dr. Bernstein emphasizes what he calls the "most important concept in finance" – the relationship between risk and reward. If investors want high returns, they must take great risks. Following this logic, Dr. Bernstein makes some conclusions that may seem foreign to most investors. For example, the best time to invest is not when things are going well, but when they are going poorly. Those who invest during a bubble are not taking a risk and therefore can expect low returns, whereas those investing during a bear market are taking a risk and therefore can expect (but will not be guaranteed) higher returns. Similarly, those who invest in "good companies" like Wal-Mart can expect lower returns than those who invest in "bad companies" like K-Mart, because good companies, with low risk, are generally bad stocks, while bad companies are generally good stocks. This idea – that high returns cannot be achieved without significant risk – is the key concept Dr. Bernstein continues to emphasize throughout the book.

While the first pillar gets the most attention, Dr. Bernstein terms the second pillar, the history of investing, as "the one that causes the most damage" to investors. What separates the professional investor from the amateur investor is that the professional recognizes that bear markets are a fact of life – they inevitably come about once every generation, usually sparked by a new technological advance. Professional investors stay the course and don’t panic; they have a plan and stick with it. In fact, for beginning investors, a bear market is a blessing, allowing them to accumulate stocks at low prices. This concept again ties to the relationship between risk and return: throughout history, in times of great optimism, when prices are the highest and the risk is the lowest, future returns are the lowest, and when times look the bleakest, and risk is the highest, future returns are also the highest.

In the third pillar, the psychology of investing, this relationship between risk and return is again raised. Most investors follow conventional wisdom of the time, investing in specific stocks or asset classes that are currently the most successful and thus buying at high prices. Dr. Bernstein provides two strategies to counter this psychology. He advises readers first to identify the conventional wisdom of the time and do the exact opposite. He also advises readers that assets with the highest future returns tend to be the ones that are currently most unpopular. The investor that is able to go against the flow – to stick with unpopular asset classes and pay attention to his or her entire portfolio return – in the long-run will be the most successful.

Finally, the fourth pillar concerns the business of investing, which details how brokers, analysts, and the media work together to make money at the expense of often ignorant investors by peddling bad or biased information. Instead of paying exorbitant fees to brokerage firms or financial advisors, which steer investors to underperforming managed funds, investors can buy low-expense index funds through companies like Vanguard and thus tap "into the most powerful intelligence in the world of finance" – the market itself, which is, according to Dr. Bernstein, the best advisor available.

Dr. Bernstein concludes his book by applying lessons learned from these four pillars and giving readers practical advice for how to construct their own portfolios. Although this section fell short of answering all my questions, the book as a whole serves as an essential investing guide in providing investors with a basic framework to use in evaluating the myriad of investing choices available. As even Dr. Bernstein concedes, "Four Pillars of Investing" is not an all-encompassing book on investing. It is not the only book you will need to read, and it is probably not the first investing book you should read, but it is nonetheless a book every investor should read.
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Mar 10, 2010

Gary Mesick rated it:

Read in March, 2010

An excellent one-book summary of how to invest for the long term. But Bernstein's great insight was how to use portfolio theory. Unfortunately, nobody understood his book on that. They didn't have enough background. Here, he provides the background, but little portfolio theory. And I already had the background by the time I got to his book. But if you don't, you can learn much here: risk is rewarded, history has patterns, you and your broker are your own worst enemies, etc.

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Feb 28, 2010

Miles M rated it:

Probably one of the best books on investing ever written. Easy to comprehend, follow and apply. I’m in the investment industry and this is a must read for anyone that actively participates in the equities market with any regularity. I particularly like the chapter on “bubbles” and you’ll recognize why after having gone through the recent financial meltdowns. This book is also one that a person can revisit over and over due to its timelessness.

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Oct 03, 2008

Trevor rated it:

Read in October, 2008

recommended to Trevor by: Chris Colburn
recommends it for: people planning to invest

I strongly recommend this book! It's great for anyone who wants to really understand how markets works and how to best approach the world of investing. However, to really get the most out of this book I would recommend having at least some knowledge of basic investment options before reading. It would probably be a good idea to read a book like "The Bogleheads' Guide to Investing" first because it introduces investment concepts such as what are stocks, mutual funds, bonds, CD's, index ...more

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Jul 19, 2009

Jonathan rated it:

Read in May, 2007

An excellent basic read which goes through the most fundamental principles of portfolio management, as advertised. Non-technical. Doesn't do a lot to discuss assessment or valuation techniques -- it mostly prescribes a passive strategy.

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Feb 25, 2008

Todd rated it:

bookshelves: finance

Read in February, 2008

Cheesy title, great book. I'm in the middle of his Intelligent Asset Allocator, which has a lot more math.

Here are the four pillars to save you some time:
1. Theory (how to price, why you should index)
2. History (Did you know the interest rate in ancient rome was 4%? You should.)
3. Psychology (ignore your instincts and what people say at dinner parties)
4. Business (stock brokers and business press -- not your friends)

Mr. Bernstein trained as a physi...more

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Feb 08, 2010

Ross rated it:

Read in February, 2010

Definitely recommended if you want to become rich. Joking aside, very sound investment advice delivered in a very readable form.

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Mar 23, 2009

Elizabeth rated it:

Read in March, 2009

A great overview of smart investing and avoiding sheep-like behavior.

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Jan 04, 2009

Zack rated it:

Read in January, 2007

A masterpiece. Worth every cent in gold. Go and buy this book!

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Feb 02, 2010

Kurt rated it:

Read in February, 2010

This was a great book. The first section was tough to get through but it was necessary to make it through to understand the whole premise. Recommend it and I plan to use it for investment advice.

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Aug 13, 2007

Nathaniel rated it:

bookshelves: money

Read in January, 2007

Another excellent addition to the library of the long-term index investor, this work present a fascinating history of financial markets, both worldwide and in the U.S. in particular. Bernstein then moves on to provide practical but general investing advice, making insightful suggestions and encouraging the reader to adopt an indexing approach. A bit academic in places, this is not a good starter work for someone interested in investing.

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Mar 24, 2008

Harland rated it:

Read in July, 2007

Bernstein is a former medical doctor who decided that it was somehow easier to bring common sense and intellectual flair to personal finance than perform neurosurgery. Fortunately for him, most of the readers will probably already be adherents to the Vanguard/Boglehead philosophy of investing: keep costs low, favor a passive strategy employing index funds where possible, and live well within your means.

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Aug 31, 2007

Junior rated it:

Read in January, 2007

I really enjoyed this book, but think I would have been a bit lost if I hadn't read some other basic investing books beforehand, not tons, just a couple like a Dummies Guide, or Bogle's Little Book...,etc. Wonderfully full of academic research and examples of index investing.

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Jan 02, 2009

fbuser580048468 rated it:

Read in January, 2009

Good solid introduction to the fundamentals. Made me want to go read the Bogle set of books... those are good as well.

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Jul 24, 2008

Holly rated it:

Read in August, 2008

Excellent book on investing! I think this book is one that everyone who manages their own finances should read and all financial advisers should read as well! Highly recommend! I think this will be an excellent reference book to keep on my shelf.

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Jul 01, 2008

Bpeterik rated it:

A bit dense, but not overwhelmingly so. Definitely written for those without a finance background, but helps to read in small chunks. A great overall picture of investing that dips pretty seriously into the easily digested technical/historical stuff.

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