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

• Win by not losing.

  
  By A11TZKN0NLBN0Y on 2004-01-23
  William Bernstein, market historian, scholar, and strategist, writes this new book with the confidence of his experience and the courage of his convictions, just as he did in his earlier "The Intelligent Asset Allocator." The work is an expansion on the theme that you cannot beat the market by timing or hiring active professional fund managers, so allocate, sit back, and enjoy the long-term ride. His advice is equally applicable to the novice as well as the veteran investor. You get a short course on what market returns you should expect, why you cannot beat the market, why the professionals can't help you, and how to set up your own portfolio using index funds. In other words, he has no use for the investment business other than the index funds it produces.
  Chapter 5 on Manias is an excellent history of economic progress, and obviously the groundwork that led to his soon-to-be-published "The Birth of Plenty" (mid-2004) on the origins of the West's affluence. I particularly appreciated his credit to Hyman Minsky on the pattern of bubbles. Although Kindleberger has covered much of the same ground and with greater visibility in the press, Minsky's contributions are more insightful to understanding the distinct nature of economic manias.
  Another interesting tidbit is his portrayal of technology as being, in general, a bad business endeavor. Bill Fleckenstein has made this point frequently that technology, unlike Buffett's desired "consumer monopoly," is easily outmoded and supplanted with the new, new thing. Let's just be thankful that earlier entrepreneurs took the time and the risk to create progress.
  The true worth of the book comes under the heading of "Why investors lose money." This is the cornerstone of Bernstein's philosophy stating that if you can keep from losing, you will win:
  (1) Instead of joining the herd mentality, get out when "everybody" knows that something is a good thing. It only means that everyone who wanted to buy already has; there are no buyers left. Prices can only fall.
  (2) Overcome overconfidence by checking the performance figures. Few professionals ever "beat the market." Why do you think you can?
  (3) Understand that all investments return to the mean, thus past performance is no indication of future performance.
  (4) Don't trade for excitement. Look elsewhere for entertainment.
  (5) Keep your eye on the long term and don't be panicked out by emotional short term swings.
  (6) Realize that there are no "great companies." The 1000+% returns are few and far between.
  (7) Accept that the market is random. Therefore don't get fooled into believing patterns repeat. Index funds are the only way to go.
  (8) Check your accounting carefully. Don't overstate your successes while forgetting your losses. Keep track of the portfolio's total return.
  (9) Don't get taken for a ride by the investment industry. Trust no one.
  It gets a little trickier when he begins building portfolios. Using representative stereotypes, he sets up hypothetical investments using US stock index funds made up of large caps, small caps, large value, small value, REITs, plus Foreign securities. The remaining assets should be split up between cash and bonds (long and short). Your results will be dependent on how well you can approximate this theories. Another catch comes with "rebalancing." Bernstein's advice here is also well taken. Sell out a portion of the superior performers to bring your percentages back in line to their desired weigh in the portfolio and re-allocate those funds into the underperformers to bring their numbers up to desired percentages. Regardless of his distain for decision making, this does require skill and action on your part, but Bernstein has given you enough help to get the job done correctly.
  
  

• The most important investment book you'll ever read

  
  By A3OBSEQX8ZEA48 on 2002-05-11
  Right up front, I read Bernstein's first book and thought it was a classic. However, it wasn't a huge market success which the author admits for many reasons but it was/is still a fine book (The Intelligent Asset Allocator).

  Now Bernstein comes back with an even better book from the standpoint of being readable for just about any kind or type of investor, experienced or inexperienced. The math and the charts are still there but with less rigorous emphasis. ...

  The Four Pillars of Investing is both a historical review of investment success and failure with a very honest discussion of risk and reward. The pillars are the theory of investing, the history of investing, the psychology of investing (which is now recognized as a critical component in understanding why we invest the way we do) and finally, the business of investing. BTW, the humor in many of these chapters has not been lost either. I don't think your favorite stock broker or investment pro is necessarily going to enthusiastically recommend that you read this book.

  Much of what is in the new book should be almost automatic wisdom/rules for investors but as we all know, we usually stray far and wide from good advice and common sense. In this post high-tech bubble collapse period, some solid review of investment principles is necessary. Call it back to basics if you will. It's just that Bernstein backs it up with the data to prove his points.

  What really makes this book different from the first book (for me personally) is that Bernstein has finally put the portfolio construction recipe on paper in Chapter 13 called Defining Your Mix.

  And now a special message to parents of high school and college graduates: buy them a copy of this book. Don't worry if they don't read it now. Or if they look at you strangely. For those that do read it, they'll be ten to twenty years ahead of their peers in investment wisdom and hopefully, financial security. And that's really what this book is all about; not how to trade or gamble on market timing but rather on how to use sound principles of investing to manage/understand risk while builiding a solid foundation of assets for the longer term.
  
  

• astonishingly incompetent work

  
  By A1QWAOF7RV5XI5 on 2002-06-25
  William Bernstein is the kind of man who, as Paul Krugman put it, would rather spend a year hunting down a fact than a day mastering a theory. His book is packed with math but devoid of intellectual content.
  Bernstein's approach rests largely on his insistence that there is no way to successfully and systematically pick stocks and obtain a better return than the market; stock movements are truly random, in both the long and short term. His justification for this claim is almost nonexistent. Only once does he, briefly, present a theoretical argument: as soon as a mutual fund manager tries to buy a stock he or she has identified as a superior investment, the buying will push the price of the stock up so that it is no longer a superior investment. That's it; the entire book rests on that claim. Bernstein does not explain where to place the threshold: why, say, a $1 billion fund will be afflicted, as opposed to a $100 billion fund. In fact, his claim is demonstrably false, as index funds are huge and have (as he continously points out) outperformed most active managers.
  There are many active managers who have beaten the market over an extended time. Except for four, Bernstein simply ignores them. He deals with Robert Sanborn's record by noting that he did spectacularly in the early 90's, and poorly in the late 90's. He then points out that Sanborn's assets increased during the 90's, and claims this as proof that asset bloat thwarts even skilled managers. This is patently ridiculous. Simply noting a correlation does not show that asset bloat affected the returns. The true explanation is that the market went bonkers in the late 90's, and Sanborn, being a superior manager, did not throw away money on tech stocks; instead he bought sound businesses, which the market ignored until after the bubble burst. It is astonishing to see Bernstein, who is a doctor, think that a correlation among a few data points constitutes proof (think of drug studies).

  Bernstein has three excuses for Warren Buffett's superior performance, and they're pretty pathetic. First, he claims that because Berkshire's stock price sometimes drops, it is not a risk-free investment. True, but so what? Second, he claims that Buffett's performance has slowed in recent years, evidence of asset bloat. Aside from the problem of proving causality, this has hardly been a problem for long-term investors, and it is due not to asset bloat but to identifiable mistakes Buffett made. (I, for one, identified several in advance.) Third, Bernstein claims that Buffett is not a money manager, but a skilled businessman who becomes an active part of the companies he acquires. This is a blatant lie: Buffett has stated frequently that he does not interfere with the managements of his subsidiaries; in fact, he refuses to acquire any company unless the management will stay in place, since he says he would he have no idea how to run it.
  Bernstein has a habit of lying. He claims that Peter Lynch's Magellan fund was not a mutual fund, but a private investment vehicle, before 1981, and so Lynch's record from 1977 to 1981 doesn't count. He makes the absurd claim that fund prospecti report the management fees, but not the operating expenses.
  In denying that superior performance exists, Bernstein nowhere ackowledges the arguments made in favor of particular approaches (e.g. value investing), let alone refutes them. He processes irrelevant fund statistics endlessly, but does not look at the theories or results of legions of superior investors (Robert Olstein, Bill Nygren, Clyde MacGregor); even with Sanborn, Buffett, and Lynch, Bernstein never mentions or engages the active managers' arguments.
  William Bernstein has no patience with ideas, and seems clueless as to how little he knows, as do his fans. He is clearly trying to play in the big leagues with only minor league talent.
  
  

• Dangerous

  
  By AIBWPE2K1ATQ8 on 2005-04-03
  Good historical data and an excellent discussion of the superiority of index funds make this book a worthwhile purchase. However, if you intend to blindly follow Bernstein's investment strategy - which lacks a deeper understanding of the importance of investment valuation and market timing - you stand to lose a great deal of money in the next ten years. Before implementing Bernstein's strategy, ask yourself just one question: "Am I aware of the statistical correlation between the market's price-to-earnings multiple and the market's return in the subsequent 10 years?". (If not, you may want to read Bull's Eye Investing by John Mauldin or Irrational Exuberance by Robert Shiller - two of the most revealing and honest investment books ever written.)
  
  Bernstein's strategy, notwithstanding its emphasis on low-cost index funds, will fail if the investor ignores market valuation levels. An index fund is useless if the index is grossly overvalued to begin with. Please, it is in your own best interest to get a grasp of valuation principles before using Bernstein's investment strategy. Take note of investment master Warren Buffett's repeated warnings that stocks are extremely overvalued. Using an index fund does not nullify this fact.
  
  
  

• Pillars of Wisdom

  
  By A39NVY8RPC1YH4 on 2003-01-03
  Bernstein's advice is to take a long step back from the daily market reports and concentrate on understanding how the markets work, the 'four pillars', and design your own investment strategy. Bernstein persuades us that with relatively little effort we can build an investment portfolio that is diversified, minimally expensive, and superior to most professionally managed accounts. An ability to estimate the long term return of the major asset classes is a critical skill. Failing to diversify across those asset classes is an investor's biggest risk. Students of modern portfolio theory (MPT) will find FOUR PILLARS to be a companion volume to Larry E. Swedroe's RATIONAL INVESTING IN IRRATIONAL TIMES. The markets are "brutally efficient". Avoid actively managed funds and use index funds to tap into the "collective wisdom" of the market. Market timing, stock-picking, and technical analysis don't work. Indexed securities may be a little dull, but the strategy outperforms the gurus. The first 'pillar' of the book is devoted to investment theory and historical returns of various asset classes. It's the longest section and some of the best material is here. In "Measuring the Beast" there is the the clearest explanation I have read of the dividend discount model (DDM) that is used to determine 'fair value'. This chapter also gives us the Gordon Equation to estimate market returns (Market Return = Dividend Yield + Dividend Growth Rate). Bernstein's conclusions are unsettling: The return of stocks and bonds will likely be similar in the future and their rates of return will probably be lower than in the past. There is no question that having an historical perspective on investment manias and crashes is an important second pillar of understanding for the informed investor. This history has been told before, but the material fits nicely. Bernstein's third pillar analyzes the behavioral errors investors routinely make. A need for excitement (viz. investors drawn towards low-probability/high-payoff situations) and a fundamental misunderstanding of risk/reward that leads investors to conclude that "great" companies must be winning stocks are just two errors that stand out. The fourth pillar of Bernstein's work is his shakiest. His caricature of the investment establishment that includes the brokerage community, mutual fund companies, and the media is painted with broad angry strokes. He is simply incorrect to say that brokers have no fiduciary responsibility towards their clients (It is required by the National Association of Security Dealers, NASD). On the other hand, his incisive analysis of the 401(k) retirement system is an important alarm. Bernstein's closing chapters address some of the big questions investors ask. His "back of the envelope" calculation for retirement nest eggs is as helpful as discovering a Leatherman Tool in your back-pocket. In a variety of investment scenarios the author ably demonstrates the application of his ideas in a specific and flexible manner. But it is fair to say that a typical portfolio will include US and foreign index equity assets with an emphasis on value (versus growth), short maturity bonds, and a real estate index fund. Serious investors will want to read this book.
  
  
• Can efficient markets go barking mad?
  By ACNBY57LG1CG4 on 2003-05-27
  Four Pillars is one of the best of the 15 investing books I have read. It is noteworthy because the book:

  * integrates numerous theories of investing (Indexing, Efficient Market, Portfolio theory).
  * places returns of various asset classes (large/small/growth/value stocks, bonds, REITs, minerals, cash) into historical perspective, then lays out a clear argument why the future may not resemble the past.
  * provides extensive evidence why investors should steer clear of brokerages, mutual funds, and the cheerleading financial news industries.
  * Bernstein has a colorful command of the language.

  It would be no problem to give more details of why this book is outstanding, and I think other reviewers have done just that. I will instead explain why I rated this book four and not five stars:

  * Bernstein is an Efficient Markets proponent, claiming that the markets are wiser than any individual investor or money manager. He concludes there is no room for stock picking. On the other hand, he observes, in his own inimitable style, "once a generation the markets go barking mad". Well, which is it? If the markets are efficient, then they will never go barking mad. And if they occasionally go barking mad, then they aren't always efficient.
  * Bernstein claims that it is a fool's game to try to beat the markets (seeing as how they are efficient). He then proceeds to claim that Portfolio Management can consistently and over the long run beat the markets (albeit by less than 1%). Perhaps he should have added a caveat to his statements rather than create the appearance of internal contradiction.
  * Bernstein makes extensive use of statistics to prove that, on average, the average investor cannot do better than the market average. He then goes on to prove that it is highly unusual for investors to have returns that are statistically unlikely. While this is simply a tautology, it is presented as a great insight into the market. For that matter, the odds that you have a college degree and have 5 close friends with college degrees is about 1 in 100. Yet I would wager that most people reading this review fit that category. Bernstein's observations are technically correct, but are a good example of Mark Twain's statement "there are lies, damned lies, and statistics".

  I raise these points not to quibble over the validity of this or that idea in this excellent book, but rather to highlight that this book includes a healthy mixture of investing theory and astute observations, and given the complexity of the market, they do not always fit perfectly.

  I have only one complaint. Bernstein waits till nearly the end to state that he is only referring to long term investing for retirement. Personally, I like to play the market with money I can afford to lose, and I generally "swing for the fences". Four Pillars is downright derisive towards this type activity. This caused me cosmic dissonance until I divined this unstated assumption.
  
  

• Best Investment Book I ever Read
  By A2HH893RJHVLN3 on 2006-01-22
  I'm a hedge fund manager, treasurer of the board of a small college, and head of the school's investment committee. I also manage my own personal portfolio. I have a fair amount of experience in the investment arena across many areas.
  
  This is the best single book I have ever read regarding investments for tax paying individuals of any economic level. I buy them by the case and give them away to anyone who asks me for advice. All of my family has one! If you take the time to read this book throughly and implement an investment plan based upon Bernstein's recommendations there is a high probability you will do far far better than if you try to do things yourself or use any sort of financial professional as an advisor.
  
  I am always amazed how people will take years if not decades to amass some personal wealth and then not be willing to put 40 hours or so into understanding how to invest it. The "financial industry" will be happy to do that for you usually at a cost of 2% to 2.5% per year. If you have a 40 year investment period, you could DOUBLE the amount you'll have at retirement simply by avoiding the annual 2.5% fees!
  
  Most of the reviewers who criticized this book miss the following key points:
  
  - Taxes matter. Alot. Almost all of the data presented by the financial industry is on a pre-tax basis. Private individuals exist primarily in a after-tax world.
  
  - Sure institutions may do things differently. They don't pay taxes. If you move things around frequently, taxes will end up being your biggest single expense. Expenses are death to the success of any long-term investment program.
  
  - Warren Buffet, David Swensen (Head of Yale's endowment) and Jack Meyer (Former head of Harvard's endowment, just left this summer) are regarded as 3 of the top investment professionals of our time. They ALL recommend that individuals use index funds. Without their resources (highly educated staffs, access to data and research individuals can only dream of, the ability to negotiate special deals due to the size of their investments, and access to opportunities which are limited to a select few) you simply have no realistic chance of picking top tier investments across many sectors where you need to pcik teh top 15% to beat the index fund approach. It is naive to think that by sitting with your PC at home several hours a week you can be in the top 15% of investors on an after-tax basis in many sectors over a long time period.
  
  - If you use index funds, over time, you'll beat 85% to 90% of the professionals in any investment sector. That means you'll be in the top 10% to 15% of all investors. If you factor in the effects of having a diversified portfolio (all with top 15% investments), your overall portfolio will likely put you in the top 5% of investors.
  
  Buy this book. Read it. Understand it. If you follow it basic tenets (low cost investing, long-term horizon, rebalance regularly, avoid fees and taxes) it will be the single most important financial decision you will make it your life. Best of all, after the initial learning period, it's simple to do and only takes a few hours per year.
  
  
• don't time the market -- except when it crashes
  By AKXDXUUZ0SWEK on 2005-08-15
  I won't do a complete review here as there are many good ones including the recent ones by Fourie, Love, and Mongle. My copy is now for sale -- I'll copy a couple of tables before it goes but beyond that I don't see unique value here. As a veteran index fund investor, former "financial advisor" client, reader of Marc Faber and the Hulburt Financial Digest, I didn't find much new or surprising here. If you're a novice, by all means buy the book. But if you've been around the block a few times and have been beat up on by the market, you might--like me--have a few reservations.
  
  My major complaint: Bernstein's world consists of stocks and bonds with a nod towards REITs. If the future mirrors the past--generally it is a good guide--following Bernstein will help you be secure in your old age. But what if the era of American hegemony is ending, if efforts to maintain an oil supply and convert to alternative forms of energy differentially stress world economies? What if water shortages and fertilizer prices increase food costs? What if the Strait of Hormuz closes? There are a lot of "what its" to consider. For myself, I'm including a "natural resource" class in my portfolio and also one REIT that is NOT representative of the class. Some of my bonds are not dollar denominated and as I look at the recent correlations between U.S. and the large foreign market indices, I'm uncertain of the utility of holding "foreign" just for the sake of it not being U.S.
  
  I'm also not sure what to make of the attempt to crush market timing. Certainly the historical work cited in the book is valid. And a look at pages 14-15 of the July 2005 Long Term Performance Ratings in the Hulburt Financial Digest shows only 5 of 29 5-year timer's asset allocation records to be above the Wilshire 5000 index. But, of around 140 stock portfolios that reported timing signals separate from stock selection, using timing alone almost 6 in 10 beat the Wilshire over 5 years. On a signal some portfolios went to cash while went short. This is a mildly positive sign. Of the approximately five dozen (I went bleary-eyed staring at the fine print and may be slightly off in my count) timing portfolios that had market-beating performance for 5 years AND a 10 year record, I found a dozen that beat the market for both periods--not a good sign at all. So, it appears that as a whole, Bernstein is still correct. Yet there anomalies like Timer Digest which appears to have "got it right" over YTD, 5, 10, and 15 year periods. And whether you call it tactical asset allocation, reblancing, or timing, on page 161 in the "How to Handle the Panic" section Bernstein recommends, "Ideally . . . [during a crash]you should go even further and actuallly increase your percentage equity allocation . . . . His example is perhaps adding 5% to your equities percentage in the event of a 25% fall in prices. Makes sense to me but it isn't exactly the "stand pat" he suggests at the beginning of the section.
  
  
• Bernstein's FOUR PILLARS Better Than Peter Lynch's Classic
  By A12AOHR0E16Y25 on 2006-05-13
  After twenty five years of following Lynch, I graduated to Bernstein.
  
  ONE UP ON WALL STREET by Peter Lynch, who was famous for beating the market with his Fidelity Magellan Fund in the 1970's and '80's.
  
  He argued that common investors could beat Wall Street professionals by holding individual stocks instead of mutual funds, and by watching everyday things around them. For example, he said when he noticed his wife and daughters bringing home fist-sized plastic eggs with panty hose in them, he found out who was making the so-called LLEGS, then bought shares of the company and made a bundle.
  
  He advised readers to "water the flowers and kill the weeds," not the other way around, a trap most beginning investors fall into. People hate to sell losers so they hang on much too long, while selling the stocks that have done well to lock in small profits, thereby forgoing much larger profits if they had let the stocks run. He spawned a whole generation of amateur investors in search of the elusive "10-baggers", Lynch's term for stocks that increased ten-fold from their purchase price.
  This book affected my investing philosophy for almost 20 years. It served me well in the 1990's because I was in the information technology business and invested heavily in this segment. Unfortunately the Internet Boom brought down all the tech stocks starting in 2000, so the Lynch strategy was devastating for my portfolio from 2000 to 2004.
  
  Starting in 2005 I diversified into a combination of asset classes that more or less match the global market, including large cap, mid-cap, and small cap stocks, international stocks, bonds/preferred stocks, REITs, and gold. A little bit of segment specialties are thrown in like commodity hedge and energy, both oil and new energy sources such as solar and wind. I still speculate on 5% of my portfolio with individual stocks, but everything else is in electronically traded funds (ETF's) or individual bonds. I don't believe in bond funds, since they don't guarantee principal like individual bonds.
  
  The best book I have found on the wisdom of asset allocation and indexing the market instead of investing in individual stocks or high-priced managed mutual funds is THE FOUR PILLARS OF INVESTMENT: LESSONS FOR BUILDING A WINNING PORTFOLIO, by William Bernstein, This book is one of the top-5 recommended investment books by the Wall Street Journal's Jonathan Clements, and the book that legend John C. Bogle, founder of The Vanguard Group, says he wish he had written. I recommend this 2002 book MUCH MORE highly than Peter Lynch's 1970's book.
  
  Following the advice of THE FOUR PILLARS, you won't beat market, but nobody really does this anyway long-term. Bernstein proves it statistically, and even shows Peter Lynch could not sustain his Magellan record over the long term. But the good news is that you won't lose your shirt and you will always do as well as the overall market, which goes up given enough time. When one asset class gets clobbered, you can sleep well knowing that one of your other asset classes is doing well to make up for the one that is suffering. Reallocate once a year but don't try to time the market, which leads to high transaction fees and ultimately to lower returns.
  
  And stay away from high priced brokers. Bernstein also warns about newsletter gurus, who cannot beat the market but zap your your portfolio with subscription fees. Be content with 6% to 8% for your total portfolio instead of gambling to get 15%+ and then ending up with -30% or worse. I got greedy and paid the price in the 1990's.
  
  Good luck with your own portfolio.
  
  David Marshall, Marshall Books, www.marshallbooks.net
  
  
  
• Best investment book I have ever read
  By A6YJ3B5C2RDL4 on 2002-07-23
  A number of reviewers comment on Bernstein's aversion to active managers.

  This is a point which has been demonstrated again and again in the financial literature. See especially 'A Random Walk Down Wall Street' by Burton Malkiel and both books by John Bogle. Although some managers, historically, outperform, they are not the same managers who outperform in the future. This has been demonstrated again and again with different sample periods and different data: it is the dirty secret of the investment management industry, that the rational investor would choose the low fee option.

  In the institutional pension fund (defined benefit) market, where fees are *much* lower and sophisticated consultants advise the trustees, you would expect it to be much easier to select good active managers. The reality, which Bernstein addresses, is that institutional pension funds make *more* use of passive or indexed funds, than individuals do.

  Bernstein's book brilliantly summarises the main points about investing for the individual investor today:

  1. stock returns are likely to be a lot lower in the future, than in the past
  2. fees on funds are going to be a very important influence on final returns (1 or 2% of 7% annualised returns hurts a lot more than of 13% annualised returns)
  3. since it is impossible to know (in advance) who the superior fund managers are going to be, it is better to lodge the majority of money in index funds, which will provide a return, long run average, better than 2/3rds of money managers, at a far cheaper cost

  But the book is much subtler and deeper than this. It looks at how we get 'valuation bubbles' like the recent dot-com/ telecoms boom, and how humans consistently make investment mistakes for deep seated psychological reasons. It helps you to look sceptically at a financial 'advice' industry, that is really there to make a living off your hard earned savings.

  Bernstein's bias is towards value investing and he correctly points out that it is possible to pursue this investing style using 'value tilted' index funds, with low fees. Although value as a style has massively outperformed growth over the last 3 years (to the tune of 40% aggregate), it is still a point worth taking in. When stocks in general are expensive (as they still are on any quantitative basis), cheap stocks can still be the way to go.

  Reading this book, along with David Chilton's 'The Wealthy Barber' and the books by Burton Malkiel and John Bogle, is likely to be among the most rewarding things you can do for your personal wealth, long term.
  
  

• The Best Investing Book I've Read
  By A1NDCI95LSJC5C on 2004-01-03
  I began seriously investing in stocks and bonds about three years ago. Since that time, I've read perhaps a dozen books on investing. This is my favorite. It has all the elements a beginning investor needs: clear explanations of basic investing concepts; lucid and entertaining prose; a brief history of the market to illustrate for the reader both the manias and extreme pessimism that have sometimes gripped it; and, most importantly, numerous cautionary tales about the industry that helps beginners make their investment choices.

  Bernstein identifies four pillars for building a portfolio: theory, history, psychology and the business. The pillar of theory is about the conceptual framework of investing. This potentially could have been a very difficult section, but Bernstein makes it very readable even though he introduces a couple of ideas he claims most brokers are not familiar with. The second pillar of history is about how markets in the West have behaved in the past. Bernstein argues this history is important to remember so that investors develop reasonable expectations for what their investment will do and recognize both the warning signs of an overheated market or the symptoms of a depressed one.

  The third pillar of psychology helps the reader to combat the usual mistakes beginning investors make: excessive trading, following hot stocks and funds, high fees, overconfidence, etc. Bernstein says the investor must learn to emotionally detach him- or herself from the investing crowd while still keeping a healthy respect for all he doesn't know. The fourth pillar of business emphasizes that those who provide investment services for you are often your worst enemy to getting a decent return on your money

  This is a great book, but not a perfect one. I wish Bernstein had explained some things more fully - especially in the first section of the book on theory. But what he does explain, he explains well enough to catapult the reader to the next level of understanding, should he or she choose to go there. Some critics of the book might argue that Bernstein says nothing new. This is true. But the effectiveness of the book is in the way it is presented and how it is written. I recently read John Bogle's book "Common Sense on Mutual Funds". It is a superb book, and has many (but not all) of the same points as "The Four Pillars of Investing". But it fails to engage the reader as well as this book does.
  
  

• This is a great book...
  By on 2003-08-04
  I won't be able to say anything that hasn't been said before, but this is really a good read on passive index investing strategy and market history. I found this to be good companion book to Larry Swedroe's Rational_Investing_In_Irrational_Times. This book covers market history, efficient market theory, statistics on actively manged funds vs. passive vehicles, and detailed information on how and why diversified portfolios work the way they do. I think the biggest hurdle people will have following the passive index strategy is having the guts to stick out bad markets and putting money into lagging asset classes by taking money from your winners.

  Overall the critics are largely irrelevant (re: people who point out Warren Buffet). Although Bernstein presents a fairly weak argument in his book about the success of value investors such as Buffet, I still think the core of the book stands on it's own.

  I like Warren Buffet's writings and investment style as much as the next person (and even own a few shares), but he really isn't running a "mutual fund" as people sometimes think. He runs a conglomerate that purchases good businesses that largely run themselves and hands money off to him as profit. This is a great business model, but significantly different from where Berkshire started decades ago. Of course most of these deals come to him because he is Warren Buffet and this gives him a decided advantage over the individual investor. I think in the end the efficient market theorists will be shown correct. I'd like to think that somewhere out there people are beating the market hand over fist continuously, but this is becoming harder and harder to do as an external investor buying stocks. Buffet's advantage over the recent past hasn't been his stock prowess but the fact that he owns the companies and has control over their destiny and cashflow.

  Regardless, this book is a great read for anyone interested in protecting their money and beating virtually all money managers with minimal stress.
  
  

• Very Good Overview of Investing Principles and Applications
  By A2LONX7E5LHCJE on 2003-09-30
  I am an avid fan of Bernstein and his fellow travelers in the Efficient Frontier, Sharpe, and other innovations of Modern Portfolio Theory, so I was disappointed to see so little of this valuable information included in this book. I understand that this book was meant to be less intimidating to the novice and intermdiate investor alike, and he doesn't disappoint with accessible articulation and a witty style that should appeal to every reader.

  The two chapters on asset allocation, the ~one~ thing the investor is able to control, and the one thing which directly rewards the investor, doesn't explain the "frontiers" and why four assets or ten is best for the individual investor. The efficient frontier in layman's terms would have been especially helpful. On the other hand, dauntless pages were dedicated to diminishing returns (DR), which were clearly adumbrated for their importance.

  Then Bernstein concentrates on Vanguard investment opportunities, with only brief reference to ETFs (exchange traded funds). Vanguard is to be commended for bringing index-investing to the fore, but Vanguard's steep minimums and stiff penalties are impediments for the smaller investor and are downright subversive to the investor who does not believe in a "buy-and-hold" theory of investing. Many ETFs are more asset specific and can be had without excess cost through a discount broker. I wish Bernstein had discussed the merits and demerits of "buy-and-hold" as opposed to, say the Fabian and other methods of entering and exiting the market on certain MDAs (moving daily averages).

  I found Bernstein's lack of mention of mid cap stocks throughout the book puzzling. None of the hypothetical asset allocations in the book have any room for mid caps, which can enhance performance and reduce risk. For Bernstein, there are only large and small market capitalization - no middle capitalization. Also, foreign funds and ETFs of foreign assets (such as EFA for MSCI-EAFE index) are considered important, but get only passing and ambiguous comments. The graphs and tables are helpful for the most part, but many are out of date, and some lacked a marked differentiation in plotting more than one overlap, which made for challenging deciphering.

  The writing is effusive and accessible, making it a good introductory book and a refresher for bulls and bears alike. Overall, I found the book to be a tad bit too garrulous, but easy to read and informative . My cavils and criticisms aside, this book is truly one of the best books on investment in print.
  
  

• Telling it like it really is
  By A1W6O6S41EVPG6 on 2003-07-07
  I enjoyed this book by William Berstein. The fact that John Bogle selected The Four Pillars of Investing: Lessons for Building A Winning Portfolio as the best investment book for 2002, I unhesitantly went out, bough it and absorbed it.

  Some of the key points are:

  The Art and Science of mixing different asset classes into an effective blend.

  The dangers of actively picking stocks, as opposed to investing in the whole market.

  Behavorial finance and how state of mind can adversely affect decision making.

  Why the mutual fund and brokerage industries instead of being your partners, are often your most direct competitors.

  Strategies for managing all of your assets---savings, 401 (k)s,
  home equity --- as one portfolio.

  William Bernstein says it best; "The overarching message of this book is at once powerful and simple: With relatively little effort, you can design and assemble an investment portfolio that, because of it's wide diversification and minimal expence, will proove superior to most professionally m managed accounts. Great intelligence and good luck are not required. The essential characteristics of the succcessful investor are the discipline and stamina...stay the course."

  Investing is a journey not a destination lined with stockbrokers, journalists, and mutual fund companies whose interests are diametrically opposed to yours. The Four Pillars of Investing shows you how to ignore distractions, stay the course, and determine your own financial direction with the sole goal of building long-term wealth for yourself and your family.

  The Four Pillars of Investing provides an easy, step by step program for achieving long-term investing success. Highly recommended.
  
  

• Every investor should read this book!
  By A1OTJ7ED08YFSL on 2002-05-16
  William Bernstein's new book, The Four Pillars of Investing, has been eagerly anticipated by readers of his first book - The Intelligent Asset Allocator. I think that readers of The Four Pillars will be just as happy as they were with the first book.

  Bernstein, together with a number of financial writers including Larry Swedroe and John Bogle, have written passionately about the merits of disregarding most of the preachings of the financial media and marketers and instead urge readers to take a sensible, rather than emotional, approach to investing. In an easily readable style understandable by most anyone, The Four Pillars provides an outstanding overview of basic concepts of risk in projecting portfolio returns and in explaining why so many investors spend so much money for worthless investing advice and management.

  The Four Pillars does a wonderful job of explaining the axiomatic principle that anticipated returns are related to the risk of an investment. I've found that Bernstein's greatest strength is that he is able to explain the mathematical and statistical underpinnings of investment theory in a way that most readers can understand. His writing is not overly technical and the book was a joy to read. Bernstein's discussion on the underlying reasons that actively managed mutual funds, stock picking and market timing only generate high costs and poor performance is excellent and quite convincing.

  I thought the book did a particularly good job of describing the mental factors involved in a long term investing strategy. The book was written after the technology crash and the events of 9/11 and draws on these events to explain the type of mental anguish which investors must anticipate over the course of a long term plan. Unlike many investment writers who simply advocate investment in equities because they historically have done better over the long term, Bernstein takes pains to advocate a diversified portfolio tailored to the investor's level of risk tolerance so that an investor can stay the course through thick and thin.

  For people who believe that they have a unique ability to actively trade their way to market beating returns - read this book and it will change your life.
  
  

• Astonishingly Incompetent Review
  By on 2002-07-22
  It's scary that a previous reviewer is actually challenging what is accepted by a wide spectrum of authors and economists, namely that index funds handily outperform actively managed ones over the long term. This is not an original Dr. Bernstein idea. The number varies but no one usually argues with the oft quoted 85% figure. THIS is what is at the heart of Dr. Bernstein's book and the book really is a cookbook about the mechanics and psychology of index investing. He does bring up some examples of actively managed funds that have had good runs for awhile and then crashed miserably. If you selectively look at certain periods of time, namely when they are having their good run, then yes, you can make the misleading claim that these funds beat the market over time. But in those cases you would have had to bail out of the funds before the storm clouds came, and this is precisely the point Dr. Bernstein is trying to make with the examples--no one knows when to do so and even if you did, you would take a capital gains bath and give up a lot of the returns anyway. Over the long term investing horizon, actively managed funds are a horrible bet. If Dr. Bernstein is incompetent, then so are: Vanguard founder John Bogle, Larry Swedroe, Burton Malkiel, Tom and David Gardner (Motley Fool), Drs. French and Fama, et al. There may be some minor valid points of contention to be taken in Dr. Bernstein's book, but to present them as evidence that the basic principles of the book are invalid is embarrassing in its intellectual dishonesty. If you are interested in how to design a portfolio with a decent long term return that will beat most mutual funds and match the market, and want to be psychologically prepared for the trials and temptations on that path ahead, buy this book. If you want to be the best pal of the commission-churners, keep your business with the load funds and stock brokers. Better yet, write a nasty review of this book or one of those of an author mentioned above.
  
  
• The best book about market investment I have ever read.
  By A2W0FVKBBUZK0D on 2005-07-27
  The title for my review essentially sums it up, so I will use this space to instead talk about what I see as a fault in this book, and that is the perceived emphasis that you cannot be a successful trader.
  
  While it is difficult if not impossible for large institutional investment firms to do better than the market on a consistent basis, swing trading has proven to be very for successful for some. While daytrading, as far as I am concerned, remains an unrewarding activity for the time and effort you put in, swing trading is relatively simple assuming you have a fair grasp of the market and you follow news.
  
  Using the recent (and current) media and investor blitz of Google as an example, anyone who could see the forest instead of the trees would have noticed how outlets who generally do not focus on the market did. All the network news shows talked about it, and it's generally pretty rare for them to talk about any IPOs.
  
  From the perspective of day traders, and even people on Wall Street, this did not signify anything special. For people who watch for these kind of things, it was surprising to see an IPO get such publicity.
  
  The swing traders, unlike those on Wall Street and day traders who cannot see the forest through the trees, probably made a ton of money off of Google, as well as on other 'trends.'
  
  Ugg boots is a fine example. Had you invested in Deckers, the company that markets the product, when you saw it becoming a 'trend' and something all the celebrities had to have, you probably would have made a pretty penny.
  
  Now while this investment strategy isn't for everyone, and i'm not saying all your money should go to a style like this at all, it is proof that you can make quite a bit off the market in the short-term.
  
  That said, the implication that large short term gains cannot be made is my ONLY criticism of this book. And in reality, this book is for long term investing, so I should not expect Mr. Bernstein to delve further into the issue.
  
  If your kids are interested in investing, give this to them. The chart for "Young Yvonne"'s investment path should be photocopied and pasted on the wall of every dorm in every college in North America.
  
  There is simply no more complete book in existence explaining safe, long term investment strategy, and explaining the basics of the stock market.
  
  I wish I read this book when I was 15. Don't make your kids wish they had as well.
  
  
• Not what I expected
  By AAVPCV1QJF6MK on 2005-10-21
  There are a few tidbits here which would be very useful to the novice investor but it is based on classical financial theory, much of which has been debunked by modern portfolio theory. I expected some real substance but it's really just a bunch of drivel.
  He is very big into index funds which for many is fine, but I wonder, if indexing is really the best way to invest then why do most of the very wealthy tend to avoid them. Universities hire money managers to actively manage their endowments and most of the affluent do the same. Just ask guys like Dennis Tito and Warren Buffet.
  
  
• Great primer on building a long-term portfolio.
  By A3KDO3XV0MK1GX on 2002-07-10
  This book is not designed for people who are trying to figure out how to make short-term profits. As the title says, this book gives you advice on building a long-term portfolio. And Bernstein stresses some main points: invest in index funds; diversify; keep costs low; rebalance regularly; tune out market noise; and stay the course.
  The information in this book is generally not complicated, and there is little math involved. The content is easy to understand, even if you are a relative newcomer to investing. He does a nice job of explaining the value bias, which states great companies often don't make great stocks. He also spends a chapter on the Dividend Discount Model, which is a fairly accurate method of determining future returns. And he has a chart in the book which gives estimated returns for various asset classes for the next few decades (hint: diversify into small, value, REIT).
  If you have read books by John Bogle or Larry Swedroe, you probably already know the main themes of this book. But if you have not, I would recommend this as a great way to learn about long-term investing.
  
  
• Must Read for ANY Investor
  By AAHV6YPLX8C4X on 2005-12-27
  If you are thinking about gaining either more control over your investments or understanding the actions of those in control of your investments, this is the book for you. Word of caution: the author is strongly prejudiced against paying someone to actively manage your account. His arguments are always accompanied by historical data and analysis to back up his position. With a chapter entitled: "Your broker is not your buddy" he is hardly subtle.
  Actually, this book is clearly written with a "something for everyone" approach to explaining investments and the markets with a specific focus on mututal funds. This book is written in a way that gives the reader a choice: 1.) Read the book cover to cover. 2.) Skip around, and choose chapters that appeal to you. I have a degree in ecomomics and an MBA. My husband is a CPA. Individually, we were drawn to different chapters in terms of providing us with new information that increased our knowledge base in various areas. In other words, it is linear in that one can easily follow the author but not so linear that one must adhere to the chapter by chapter reading of it. BTW-dont let my background prejudice you. This book is written and illustrated (love the graphs and stats) whereby a reasonably intelligent person with no financial background, can understand the author, and enjoy the subject matter. Bottom line, if you are looking to start the year more informed as to your financial choices with regards to investing this book ia well worth the cover price.
  
  
• Re-write of a classic
  By AB3TJAZLAA7HS on 2006-01-31
  This is Bernstein's second book on investing. All investors should read one or the other.
  
  For the most part, this book is a duplicate of his first, "The Intelligent Asset Allocator", in some places word-for-word. In a nutshell, if you are already a convert to passive index investing and want to dig deeper, read the first book; if you are just getting a glimmer of the dangers that lurk in the financial-services industry, read this one.
  
  This book is better-written than the first, longer and more basic; although it eventually gets to the same place. The one important addition in this book is Chapter 8 "Behavioral Therapy" where Bernstein helps you to stop being your own worst enemy.
  
  
• Condemned to mediocrity
  By APJNMA1FFM2VK on 2006-12-24
  I smell a straw-man. The author is trying to sell you a book. Obviously none of us will replicate the index exactly because we don't live for 300 years and, if my heirs blow my fortune, that's no skin off my nose anyway.
  
  The long term market chart outlines a possibility, an investing goal if you like, the market potential. Our average net personal achievement will be lowered by the various frictions that eat away at the results: taxes, inflation, commissions, mistakes and so on. But it is important to realize that the average is made up of under-performers and over-performers. That being the case, why is it impossible, as Bernstein implies, to beat the averages? Some people, by mathematical necessity, must have beaten the market as otherwise the market would be lower to the point that it averages out all the investors.
  
  By stating that the average investor cannot beat the market and must be content to achieve the average through index funds, Bernstein automatically condemns his readers to mediocrity but does not save them from under-performance. Anyone who gets in and out of index funds at the wrong time will under-perform.
  
  
  
  
• Good but long and a bit like being told "Eat Your Veggies"
  By A1Q3NEWIBGEM16 on 2007-01-21
  The book's message is a good one:
  
  * Despite the fact that you think you are the world's gift to the financial world you probably aren't going to be able to beat the market. (If you are reading this Warren, I am not talking about you.) So, you are probably going to be better off investing in stocks broadly. In other words, invest in an index fund or two instead of picking individual stocks. You will enjoy low fees, yet still beat most of the dummies (and man, does he pan those folks!) who manage mutual funds.
  
  * You should diversify into international stocks. You should invest in bonds if you are risk-averse.
  
  * You need to be careful about your own psychological tendency to ruin the performance of your portfolio by buying high and selling low. I can verify the truth of this!
  
  * You need to get off your duff and actually save and invest some money for your retirement (!)
  
  * You should completely ignore what the financial pundits and the popular press have to say about the stock market and which stocks are "hot".
  
  * Plan your retirement carefuly and realistically and keep it in mind as you pick your investments.
  
  * Run from full service brokers and DON'T TRUST THEIR ADVICE in general because most are just lining their own pockets and don't really care about yours.
  
  Overall it was a good book which is why I gave it four stars. One issue I had with this book was that it was a bit long-winded and slightly preachy. Yes, Mum, I know I need to eat my veggies but that doesn't make for a particularly exciting read. The message of the book could really have been summarized using a set of bullet points on one page. Believe it or not, this is Mr. Bernstein's second try at writing a readable treatise. Third time is a charm?
  
  So, if you are looking for the quick bottom line, maybe this isn't the book for you. If you are looking to read about the history of the stock market with a generous helping of mathematical analysis to boot, go for it!
  
  One other bone to pick: Mr. Bernstein makes so many references to the Vanguard fund family it starts to seem like one long info-mercial.
  
  Overall though, the book contains a lot of reasonable advice that you would be wise to take.
  
  
• 5 top insights from The Four Pillars of Investing
  By A3U5J2KVUWY2Z1 on 2003-10-03
  1. Risk and return go hand in hand:
  No matter what type of investment you make, "you are rewarded mainly for your exposure to one thing - its risk... The biggest risk of all is failing to diversify properly."

  2. Learn from history:
  Sometimes the investing public loses perspective, and becomes either unjustifiably positive or negative. Any investor who does not understand history is operating with a significant handicap, and the book offers a primer on financial history.

  3. Human nature can lead you astray:
  Unless you become aware of - and resistant to - these common flaws, human nature suggests you will have a tendency to: pay too much for some types of stocks, trade too much, tend to be overconfident, and "regularly make irrational buy and sell decisions."

  4. "You are locked in a life-and-death struggle with the investment industry":
  Financial services companies exist "almost entirely for one purpose: the extraction of fees and commissions from the investing public." Furthermore, the author argues that the industry "operates at a level of educational, moral, and ethical imperatives that would be inconceivable in any other industry."

  5. Figure out what you are going to need, then devise a strategy to get there:
  Based on the four "pillars" outlined above, the author presents a series of steps designed to help you calculate how much you will need to save to meet your goals, and how to design and manage your financial portfolio so that it takes you where you want to go. "With relatively little effort," concludes the author, "You can design and assemble an investment portfolio that, because of its wide diversification and minimal expense, will prove superior to most professionally managed accounts."
  
  

• The Best Investing Book I Ever Read
  By A2QAOP52OEB5EV on 2006-09-20
  Well...maybe second best...haha. The best investing book I ever read is still the classic, "A Random Walk Down Wallstreet" because it's more concised. This book is a lot more comprehensive but basically preaches the same message. For those who don't really have patience reading almost 300 pages, two words for you: index fund. Specifically, Vanguard Index Fund. So on the cover of the book, you see a comment from Bogle hailing it as the "Best investing book of the year"...mmm...wonder why. But the fact is, the Vanguard 500 is the cheapest S&P 500 index fund you can find. By cheapest I mean annual management fees that mutual funds charge...1% of a billion is a lot of money, and the fund managers get a fixed percentage regardless of the performance of the fund...robbery. This is one of the points the book makes: not to trust the so-called "advice" from the people in Wall Street.
  
  The four pillars are:
  1) Theory of Investing: Relationship btw risk/reward, how to properly estimate the discount value of an investment (the higher the risk, the higher the discount value)
  2) Psychology: Understand that people are social animals and what they do as a group is not always logical. Investing takes conviction and staying the course of one's own individual path.
  3) History: Know the history of the markets. Once or twice every generation, bubbles get burst. Buy after they've been burst.
  4) Business: The financial industry people are con-artists. Think: if they know what is going up or down, why would they tell you? If they really do know, they would be at a beach somewhere.
  
  I highly recommend people to read this book. It is very-well written and an addictive read. Other than indexing, for a more advanced approach, this shows how you can reallocate your portfolio based on asset class. For example, most people will have a portfolio with 60% stocks and 40% bonds, but within the 60%, you can further divide them based on value or growth and small-cap or large-cap. Value and small-cap historically gives more bang but you cannot have the bang without the added risk.
  
  There is a lot of useful advice in this book. But if you have to remember one thing, if I have to pick the most important thing to remember for my investing days, it is this: Investing is boring...if you're having too much fun, something is wrong.
  
  
• Erudition Spoiled by Intellectual Dishonesty
  By A1EZ5I58ML0CAB on 2002-07-24
  The best single critique of the efficient market theory was done by Warren Buffet in "The Superinvestors of Graham-and-Doddsville." Bernstein never troubled to address it.
  
  
• The truth hurts
  By on 2002-09-16
  I never thought I would say that I had a hard time putting down a book on finance, but I am mesmerized by this one. First, this book clearly states a lot of cold, hard truths about the market that the average person may have a hard time believing, but I can tell you that the author echoes just about everything that my professor taught about the market in my graduate finance class. I didn't believe him then, but after going through a couple of market ups and downs, I sure do now! Second, it explains a lot of tough concepts in a humourous and clear manner. Warning: this book is highly critical of the financial industry and those who work in it, so don't ask your stockbroker what he thinks about it! The best part is that I think he blows away a lot of misconceptions about the market while offering a reasonable investment program for the average guy. No miracles, no get-rich-quick schemes, but a sound, statistically supported method to invest and grow at least at the same rate as the market. Yeah!
  
  
• Excellent advice and sound research
  By A2D46Z7D2LHYVS on 2006-05-16
  This book is not very easy to read. Bernstein can occasionally be very detailed, and occasionally ventures into serious mathematical discussions on personal finance. However, it is worth persevering, for Bernstein's book is a very sound defense of index-based personal finance, with extremely persuasive arguments and thorough supporting data.
  
  Bernstein tends to overstate efficient market theory. In parts, it seems that he argues that the market is efficient even in the short term, which is definitely not true. A better position, expressed best by Burton Malkiel, is that the market is not efficient in the short term, but that transaction costs prohibit individual investors from profiting from these inefficiencies. Both agree, however, that the market is efficient in the long term and that hence the best strategy for individuals is a passive index that matches personal risk tolerance.
  
  Bernstein's aggressive recommendation of Vanguard also makes him come off as a bit of a shill. However, his intentions seem well-placed. After all, very few companies come close to matching Vanguard's index funds.
  
  Overall, this book is worth the time it takes to read, and is a worthy addition to the existing collection of pro-indexing personal finance books.
  
  
  
• Erudition Spoiled by Intellectual Dishonesty
  By A1EZ5I58ML0CAB on 2002-07-24
  The best single critique of the efficient market theory was done by Warren Buffet in "The Superinvestors of Graham-and-Doddsville." Bernstein never troubled to address it.
  
  
• Good book but overlaps with his original book.
  By on 2002-08-16
  Well worth reading but much of the content will seem familiar to readers of his other book (The intelligent assset allocator)
  
  

• The Intelligent Asset Allocator: How to Build Your Portfolio to Maximize Returns and Minimize Risk
• The Bogleheads' Guide to Investing
• A Random Walk Down Wall Street: The Time-Tested Strategy for Successful Investing, Ninth Edition
• The Little Book of Common Sense Investing: The Only Way to Guarantee Your Fair Share of Stock Market Returns (Little Books. Big Profits)
• All About Asset Allocation