First let me say I am a big fan of his previous books “The Intelligent Asset Allocator” and “The Four Pillars of Investing”. So don’t take anything I say as disliking his work. On the contrary, I feel all three books are a MUST read primer for a good financial education! Maybe one day I’ll go re-review the other two books. William Bernstein, who is a neurosurgeon by trade, took the nebulous field of investing and puts it into understandable terms. He had a Money Magazine column, and a web site (which unfortunately is updated sporadically).
Previous Book Summary
For anyone who’s not familiar with his work, let me give you the poor man’s Cliff Notes:
- The most important concept in investing is that risk and return are inextricably intertwined. Generally the higher the return, the greater the risk.
- The stock market is efficient for the long term (though does not go into great depths about short term variances)
- He’s a believer in the modern portfolio theory. His books go into great detail behind the mathematics and statistics of asset allocation.
- Indexing investing beats most mutual fund managers. It is next to impossible to determine who the 20% of mutual fund managers that beat the S&P 500 over a 10 year period.
- As a mutual fund grows in size it almost becomes the market it is tracking against. Managed mutual fund expenses make them under perform the market by their expenses.
- Timing the market is almost impossible and is a fools game.
- The over goal to investing is to win, by not losing. The goal shouldn’t be to beat the averages, but to match the averages.
- Discusses when should a portfolio be rebalanced
- That Wall Street is not your friend (I don’t totally agree on his sentiment, but overall correct)
“The Investor’s Manifesto” by William Bernstein starts where “The Four Pillars of Investing” left off, with a dash of today’s economic climate. When he finished “The Four Pillars of Investing” he initially felt his work was done, until 2008 rolled in. There was touts in the news that diversification is dead, buy and hold fails, and he wanted to re-address these issues. The book is shorter than his previous (comes in at only 201 pages) and the chapters consist of:
- A Brief History of Financial Time
- The Nature of the Beast
- The Nature of the Portfolio
- The Enemy in the Mirror
- Muggers and Worse
- Building Your Portfolio
- The Name of the Game
Instead of summarizing each chapter, I’ve decided to give you some interesting snippets from the book:
Related to diversification, I found these quotes interesting:
Diversification among different kinds of stock asset classes works well over the years and decades but often quite poorly over weeks and months.
An investor cannot earn high returns without occasionally bearing great loss. If the investor desires safety, then he or she is doomed to receive low returns
The goal is not to maximize the chances of getting rich, but rather to simultaneously allow for a comfortable retirement and to minimize the odds of dying poor.
Regarding inflation he states:
..another important rule of finance: Always think in after-inflation, or “real” terms; this avoids having to correct later for the effect of long-term inflation. In the end, focusing on real returns streamlines thinking and helps investors tune out the noise they will hear about how inflation “corrodes wealth.”
On bonds and how they relate to inflation:
Since inflation is the greatest single threat to any bond portfolio, and since long-maturity bonds suffer the most in such a scenario, you should strive to keep the average maturities of your bonds well under five years.
While this book is good, it’s not as good as his previous work. Some of this book summarizes his previous books, and I wished he would go into more details in a few specific areas. My comments are:
- He mentions how much he hates the investment houses (otherwise known as marketing companies), and how they are ripping off the general public. While I agree for the most part, I believe in more financial education on the investor is required, than putting complete blame on the investment houses. Buyer beware definitely applies to investing! The general public spends more time on deciding on what to eat for dinner than what to invest in. Shame on us (the general public).
- Related to this, it seems he’s more for pensions and the “nanny” state where the government is more involved with investing. While he did not directly state this, I suspect he’s all for more regulations, which history has shown does not help. I believe education is more the answer.
- Although he’s completely against it, I think there are cases where a person does not want to learn or does not have the stomach for investing. In those cases it may make sense to use a financial adviser. For me this definitely does NOT apply.
- He mentions bonds as one big blob (ie 40% of your investments). He does not break it down like he does for stocks, but suggests a total bond fund. It would have been nice to see details about the suggested break down of bonds in government, munis, corporate, and foreign. In my opinion I think it’s foolish to have 40% allocated to U.S government bonds.
- He mentions that gold (or precious metals) is not a great investment. He is somewhat correct; it’s meant to preserve wealth, not generate wealth. It’s meant to hedge against inflation, deflation, or government uncertainty.
Overall, if you have already read the first two books, you should read this one as it does go into additional details about asset allocation and updates it to discuss ETFs in your asset allocation mix.