In The Investor’s Manifesto, William Bernstein, who is a neurologist by trade, takes the nebulous field of investing and puts it into understandable terms.
First, let me say I am a big fan of William Bernstein’s previous books, The Intelligent Asset Allocator and The Four Pillars of Investing. Bernstein also had a Money Magazine column for years, along with a web site (which unfortunately is updated sporadically).
I believe that, put together, all three books are excellent for your financial education.
What Are Bernstein’s Beliefs?
For anyone who’s not familiar with Bernstein’s work, let me give you the “Cliff Notes”:
- The most important concept in investing is that risk and return are inextricably intertwined. Generally speaking, the higher the return, the greater the risk.
- The stock market is efficient for the long term (however, Bernstein does not go into great depths about short-term variances).
- Modern Portfolio Theory. Bernstein’s books go into great detail about the mathematics and statistics of asset allocation.
- Index investing beats most mutual fund managers. It is next to impossible to determine who are 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 underperform the market by their expenses.
- Timing the market is almost impossible and is a fool’s game.
- The overall goal to investing is to win by not losing. The goal shouldn’t be to beat the averages, but to match the averages.
- Wall Street is not your friend. (I don’t totally agree with this sentiment, but overall it’s correct.)
What Is The Investor’s Manifesto About?
The Investor’s Manifesto where The Four Pillars of Investing left off.
When he finished The Four Pillars of Investing, Bernstein initially felt that his work was done… and then 2008 happened.
The news started touting that diversification was dead and that buy-and-hold strategies would fail. Bernstein wanted to re-address these issues.
This book is shorter than his previous (coming 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, Bernstein 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 single greatest 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 Bernstein’s previous work. Some of this book summarizes his previous books, and I wished he would have gone into more details in a few specific areas.
- Bernstein 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 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, in which the government is more involved with investing. While he does not directly state this, I suspect he’s all for more regulations, which history has shown does not help. I believe more education is a better answer.
- Although he’s completely against it, I think there are cases in which 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.
- Bernstein mentions bonds as one big blob (i.e., 40% of your investments). He does not break it down as 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 Bernstein’s first two books, you should read this one as it does go into additional details about asset allocation and updates his philosophy to discuss ETFs in your asset allocation mix.