Tuesday, April 11, 2017

Review: The Four Pillars of Investing

I would strongly recommend anyone serious about investments start their education with this book.  I first read The Four Pillars of Investing (McGraw Hill, 2010) by Dr. William J. Bernstein a few years ago. I reread it recently in preparation for this review. Like any good book, new insights and appreciation emerged on rereading.

The Structure of the Book

The author uses an architecture metaphor, asking what pillars should underpin your investment portfolio. His four pillars are:
  1. Theory of Investing
  2. History of Investing
  3. Psychology of Investing
  4. Business of Investing
I was hesitant to even list these pillars in the review, as they make the book sound heavy and boring.  But it is not that at all! Rather, it is one of the most interesting investing books I have read!

Each of the themes is covered in a number of chapters.  For example, Chapter 3 "The Market is Smarter Than You Are", is his take on the efficient market hypothesis.  As well as providing the statistics to show that most funds will be, on average, well, approximately average, he makes the strong case that you can't pick stocks and you can't time the market successfully in the long term.

I particularly liked the historical depth of the book, not just in the second section but throughout.  He starts off the history section with the statement: "About once every generation, the markets go barking mad." I loved the many historical tidbits I learned, such as that Isaac Newton had big investment losses in the South Sea Bubble, or about the early 'stock exchange' in the coffeehouses of Change Ally. While these examples may be considered trivia, the historical aspects of the book help us place boom and bust, risk and reward, within a long equity history.

The above is not the only clever opening statement.  The psychology section starts "The biggest obstacle to your investment success is staring out at you from your mirror." In chapters 7 and 8 he offers insight on investment emotions, and practical advice on how to reign in investor behaviour issues. It is full of gems like
"...asset classes with the highest future returns tend to be the ones that are currently the most unpopular."
In answer to the question "To whom do I listen?", Dr. Bernstein offers the same advice of many others to tune out the investment noise. He then goes on to summarize with remarkable simplicity and clarity the two aspects  that you may well need guidance with.
  • Your appropriate asset allocation
  • Being self-disciplined in your investments
While the majority of the book is concerned with establishing the four pillars, closing chapters deal with putting it all together (his so-called investment "assembly instruction booklet'). While the specific advice must be placed within the context of the time that the book was revised, now almost 8 years ago, the general theme of using low cost passive index investments, appropriately diversified across different asset classes, remains as true today as when the book was written.

Why I Liked It

I find that too much investment writing tries to jump to just the answers - without first establishing a base to critically evaluate any proposals. This book fills that void.

The book will help you see investments within a long term historical trend, quantitatively establishes the importance of asset allocation, and helps you avoid paying too much for financial services and reign in your own worst tendencies.

The writing style is clear, engaging and, dare I say fun?  The historical tidbits, and statements of principles through analogy and metaphor, make the book feel light, while teaching you some critical investment truths. He wrote the book with that aim – to appeal to an audience that did not embrace mathematics.

In an earlier review of a different book, I mentioned that after reading a book I ask myself the following four questions.
  1. Was my time invested in the book, time well spent?
  2.  Do I have confidence in the validity and balance in the presentation? 
  3. Was I engaged in the book? 
  4. What were the author's motives in writing the book? 
I enthusiastically answer YES to the first three questions.  While any author hopes to have some financial success with a book, I feel that Dr. Bernstein, first and foremost, wants to help individual investors have success and avoid blunders.

The Author's Other Books

The author has been prolific in his investment writing, and you may well be interested in some of his other books. Prior to this book, William Bernstein wrote The Intelligent Asset Allocator, a more mathematically based book than this one.  I have not yet read it personally, but plan to.  It has received high praise from readers.

More recently (published in 2012) his The Investor's Manifesto covers some of the same theoretical underpinnings as The Four Pillars of Investing.  It is richer in mathematical basis, and of course more up to date in the current index investing landscape.  I hope to give it a full review in the not too distant future.

You can get a full list of his investing books on his website, http://www.efficientfrontier.com, including his Investing for Adults series which I have not read.

In case you were wondering about his background, William Bernstein followed work in science into a career as a medical neurologist.  He lives in Portland, Oregon, and for a number of years his efforts are invested in financial theory and history, and investment writing. The Globe and Mail did a nice interview with him that is available here.

Concluding Thoughts

If you are just getting started in investing, this book is the perfect place to start.  It will help you think about the big picture before you start considering advice for specific investment instruments. The book is interesting to read, and provides a solid grounding.  It's not surprising that it has a large number  of positive reviews on Amazon and similar sites.

Especially for Canadian investors, this is not a DIY manual though. After reading the book you will need to go to other information sources (dare we say including our website?)  for help in putting together a specific intelligent portfolio for your investment situation.

If picking up the book used, make sure you get the 2010 edition, and not the 2002 edition.  Both are still available on Amazon.  The 2010 version has a red bar across the top of the cover.

 If you use an eReader, the book is surprisingly inexpensive on Amazon.ca - just CDN$2.61!  I am not sure if it is always this inexpensive, or a limited time sale price, but the book is an incredible deal at this price. The ebook is also available on CloudLibrary, should you have an account through your local public library.

I have no hesitation in placing this book in the top few investment books you should read! Enjoy! As one of the reviews on Amazon commented:
"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."
I agree.  Whether starting out in investing, or if you have been an involved investor for many years, or even if you are a professional financial advisor, you will find real value in this book.

This posting is intended for education only and should not be considered investment advice. The reader is responsible for their own financial decisions.  The writer is not a professional financial planner or investment advisor. For major financial decisions it is always wise to consult skilled professionals. While an effort has been made to be accurate, any statements of fact should be independently checked if important to the reader.

Disclosure:  No compensation by any company, organization or individual has been offered, requested or received for writing this column.

Books for Review: I will not promise a positive, or even any, review, but if you wish to submit your investment book for me to consider, contact me rhawkes (at) chignecto.ca. I am particularly interested in Canadian books.


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