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

The scope and breadth covered is exceptional and quality of writing quite entertaining. The historical education is essential to understanding and instituting an efficient wealth building plan. Kudos to Dr. Bernstein.

This is a great book. While the topic is complex, the book is written in a straight forward manner that is easy to follow and understand. I recommend this book for anyone interested in learning the history and basics of investing.

The book takes a long term perspective. It analyzes various scenarios on a long term basis. The logic is very clear in terms of analyzing patterns over long time intervals. The author makes his case very well to invest on a broad based index funds. He also emphasizes the lopsided market of investment advisers and financial services companies.

Overall a very good book.

After reading other reviews, I had to give this book a try. Other reviews are spot on. I was so impressed with this book, I ended up purchasing "The Investor's Manifesto" also by William Bernstein. Highly recommended.

Novice to intermediate personal investors will benefit from this book. Bernstein takes extra effort to simplify the intimidating jargon of investing. If you can practise preventative maintenance on your car, then you can personally manage your own investment and retirement. This is an excellent book to get you to take the first steps toward managing your own savings.

Best investment book I have read thus far. I have read 3-4 books and this one was the most descriptive, succinct and informative. A must read for anyone interested in learning the basics of investing.

Like Bogle, this is probably the best advice on investment you can obtain HOWEVER....

I would have easily given it a five star but, Bernstein engages in the marketing tactics of the mutual funds (he scorns) who do the same in order to sell/market to make more money on increased volume(shame shame). He doesn't update the text throughout the book to represent the recent economic events (like a typical college text book). He adds a college midterm paper length addition at the end of the book to update recent economic events. I advise, buy the cheaper original version and read the added ending on the store in the "search inside this book" link (if they don't get rid of it after I make this post). Dr. Bernstein, you have a fiduciary responsibility to be better than this "new edition". Please refund.

Bernstein adequately covers the bases of the art of investing with proper conclusions for most. The subject matter is still too obtuse for the uninterested including my granddaughter and most of our legislators who would use this reading matter to go to sleep by.

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.

Overall, Bernstein seems like a decent bloke, but when it comes to important aspects like your money, one needs to separate the wheat from the chaff.

"The Four Pillars of Investing" sounds like building a financial house on solid ground, and who doesn't want to do that? It's an excellent title, no doubt. I feel more confident just reading it. However, in the same book on investing, that you just bought, the author tells you not to invest -- i.e., not to buy individual stocks. Nor does he really encourage you to learn anything about them, because, of course, investing "involves little effort" and you should just buy an index. Any time I read "don't buy individual stocks" from a financial author(s), it suggests to me a lack of experience in investing, in the nitty gritty and mechanics of the markets, or that they're even a bit fearful in taking risks. And that's what I think is the case here.

Now, some of the research is fun at times. I liked reading up on the history of Italy’s prestiti, something I will forever credit this book for bringing to my attention. Bernstein also details centuries' old shipping-investments debacles, as well as some of Jack Bogle's early beginnings, among other events. But I didn’t buy the book to have fun. I bought it to learn more about investing. Not only that, I felt that the fourth pillar was more of an afterthought with no real, clear message, which of course was a major disappointment given the lengthy build-up of the first three.

I mean, I get it. Indexing works to a certain degree. I'm just not a fan of the whole "invest with little effort" that gets bandied about in the industry these days. Learning about investing, in a hands-on way, actually takes a lot of time and hard work before you can find out what works best for your personal financial goals, personality, and risk tolerance. If you want in-depth coverage of investing and how the market operates, there are more necessary reads for the serious investor. This one’s a skip.

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.

Overall, Bernstein seems like a decent bloke, but when it comes to important aspects like your money, one needs to separate the wheat from the chaff.

"The Four Pillars of Investing" sounds like building a financial house on solid ground, and who doesn't want to do that? It's an excellent title, no doubt. I feel more confident just reading it. However, in the same book on investing, that you just bought, the author tells you not to invest -- i.e., not to buy individual stocks. Nor does he really encourage you to learn anything about them, because, of course, investing "involves little effort" and you should just buy an index. Any time I read "don't buy individual stocks" from a financial author(s), it suggests to me a lack of experience in investing, in the nitty gritty and mechanics of the markets, or that they're even a bit fearful in taking risks. And that's what I think is the case here.

Now, some of the research is fun at times. I liked reading up on the history of Italy’s prestiti, something I will forever credit this book for bringing to my attention. Bernstein also details centuries' old shipping-investments debacles, as well as some of Jack Bogle's early beginnings, among other events. But I didn’t buy the book to have fun. I bought it to learn more about investing. Not only that, I felt that the fourth pillar was more of an afterthought with no real, clear message, which of course was a major disappointment given the lengthy build-up of the first three.

I mean, I get it. Indexing works to a certain degree. I'm just not a fan of the whole "invest with little effort" that gets bandied about in the industry these days. Learning about investing, in a hands-on way, actually takes a lot of time and hard work before you can find out what works best for your personal financial goals, personality, and risk tolerance. If you want in-depth coverage of investing and how the market operates, there are more necessary reads for the serious investor. This one’s a skip.

So, this "new edition" basically amounts to an excellent, 2010, fourteen-page postscript tacked onto a verbatim reprint of the original 2002 edition? Hmmm. Savvy investor that he is, ol' Bill doubtless relishes reaping a whopping return on a relatively wee investment of (fresh) human capital. Shrewd! ;-)

In any case, I separately relished Bernstein's 2009 "Investor's Manifesto"--which (as the author himself essentially concedes in its preface) is likely a better choice for lay, beginning investors because it minimizes (or "segregates") the "unnecessary complexity" of this "2002" book's sundry "tables, graphs and examples."

That said, there's certainly enough textual subject matter here NOT included in "The Investor's Manifesto" to warrant your perusing "The Four Pillars of Investing" too. Perhaps you should check out both books via your nearest public library before deciding which one(s) merit permanent inclusion on your personal bookshelf.

I'm an investment advisor.

I recommend this book to all laypeople who want to self-educate.

In my opinion, this may be the best investing book for laypeople ever written.

The first part was kind of thick, in my opinion (it is about history of investing and the risk/reward tradeoff). But if you slog through those first few dozen pages, you will be richly rewarded by the rest of the book.

Only other books that come close to this book, in my opinion, for self-education of laypeople are:
- Common Sense on Mutual Funds, by Bogle, and
- A Random Walk Down Wall Street, by Malkiel

The other couple reviews are dead-on that this book is essentially a reprint of the 2002 edition with a short commentary on the great recession. Mr. Bernstein and his publisher are capitalists--the basic tenant of the book no less, so I have no issue with the virtual reprint. Yet, the book is so good that I see it almost as a community service to re-release the book. If it saves a few more investors from high costs, poor allocations, investment salespeople (not true advisors) and bad behavior society at large will be better off. A word of caution: as much as I love this book, it is geared more so for an engineer-type mentality even though it is less technical than "The Intelligent Asset Allocator." "Investor's Manifesto" is a more readable and still very worthwhile book with similar content as "The Four Pillars". Be sure to check out Bernstein's columns in Money Magazine (one of the only worthwhile columnists in the magazine) and periodic thoughts posted on his website at [...]

Here's a quick statistic for you. In 2008 Morningstar tracked 11,585 stock mutual funds. In 2008 11,584 of those funds had negative returns. Crazy huh?

In any given year most mutual funds underperform the market in general. Add to that the fees you pay to a manager for their 'performance' and your returns get even worse. The question then is why would you pay a professional to do your investing for you?

Maybe you don't know how to invest, and you have no idea where you would start. Well if you are looking at this book you have found a great place to start, and this could potentially be the only investment book you need for a long, long time.

Here's a brief walk though The Four Pillars of investing:

Pillar One - The Theory of Investing

This section covers the the basics of what you need to construct your portfolio. First is the link between risk and reward, as well as when and why you should choose to invest in risky assets. Next is how returns are measured and how the price of an asset should be determined. Finally the section is wrapped up with the basics of of asset allocation and how to construct your portfolio.

Pillar Two- The History of Investing

Pillar two gives you a brief history of market returns, including booms and busts. This is the interesting history of times when investors lost sight of the fundamentals and markets went too far in one direction or the other. If you think irrational booms couldn't happen again then you haven't been watching the rise and fall in the housing market recently.

Pillar Three - The Psychology of Investing

Economic theory tells us that humans are perfectly rational beings who always make the right choices. Unfortunately this is rarely the case, which can cause some havoc on investment returns, both because of market participants and because of mistakes you make yourself.

This section of the book gives an excellent introduction to behavioral finance and how understanding it can help your returns. One good example is the good company/great stock fallacy. Many people think it's wise to invest only in good companies. The problem with this line of thinking is that everyone knows the company is good, causing a run up in the stock price. Once the stock price is up then that limits the potential of above average returns.

There are many other examples, but I will leave them to the book for you to read.

Pillar Four - The Business of Investing

The last section is one of the most important ones to understand, and that is all about the investment industry itself. During the California gold rush many people came to the West Coast in search of profits. Many smart people realized that the most money could be made not by looking for gold, but to sell mining equipment to those searching.

In the same sense, many smart people have come to realize that the most money can be made not by smart investment strategies, but instead by selling those ideas and strategies to others. Stock brokers, fund managers, and financial pundits all make a living selling you ideas that they don't follow themselves.

Recommendation

I highly recommend this book to anyone looking for an easy way to build a portfolio. William Bernstein shows you that you only need two things to be successful with your investments: proper asset allocation and self-discipline. By minimizing costs and keeping it simple you can match the returns of the market, and by doing that you will outperform a huge number of your friends, and even a large percentage of mutual fund managers.

If you have any money invested at all, or if you want to start, get this book. It will serve you well.

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.

Prior to reading Bernstein's incredibly elucidating book, I cheered and hollered at every sign of a bull market and dutifully plowed my spare pennies into foreign and domestic equities. After reading it, I'm reticent about short term rises in equities, quietly wish for a downturn, and am scrutinizing the bond market for more opportunities. Most of this change in focus I attribute to the four pillars Bernstein thoughtfully and thoroughly describes in this much needed guide to investing theory, history, behavior, and finance. The remainder of this change I attribute to an aggressive investment strategy that, after over a decade of dollar cost averaging, left me barely breaking even.

This isn't to say my previous strategy was a bad one (although it has been disappointing). In fact, my previous strategy simply applied the conventional wisdom. Bernstein explains why the conventional wisdom will only take you so far. He further explains, through a combination of graphs, synopses of multiple booms and busts, and a mix of various portfolios, why exposure to bonds is an essential, the future returns of equities are likely to be diminished, and expenses and taxes can dominate even the best performing portfolios over the long term. In addition to these valuable insights, Bernstein points the reader to the most useful financial reads a novice investor can refer to as he or she navigates an unpredictable financial landscape (some of which are listed at [...]).

For all these reasons, The Four Pillars of Investing is the most useful book on personal finance I've come across. Only the author's recent update (The Four Pillars of Investing: Lessons for Building a Winning Portfolio) is likely to be better.

This book will likely change your views on investments, the "financial community" and your approach to financial planning. Unlike many informative books on the subject, it's well written, entertaining and informative. Bernstein backs up his approach by citing solid research, quotes from experts, and personal experience.
Regardles of your personal investment strategy, you owe it to yourself to digest this book before you invest another dime.

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.

William Bernstein once again makes his case for indexing and throws in a good story along the way. There is a lot to like about this book and the historical section in particular is interesting and unique in investment literature. Bernstein traces much of the performance of the last twenty years back to a sort of backlash to the deflation of the depression years and notes the troubles in coming off the gold standard in the early twentieth century. True to current investment themes he offers yet another estimate for long term future returns (lower of course). One of a cast of thousands. I am not convinced by the case he has made for indexing only. Not that I think indexing is a bad way to go (it may be the only way to go) but this book does not prove the superiority of indexing. It does provide a strong case for it however. Indexing is a great way to proceed for the monies we must have in the future. It is interesting to note that the literature from Tweedy Browne takes exactly the opposite side of the equation. Lately I have noticed this tendency in several investing books/resources. For instance Bernstein notes that there is no reason to expect a money manager that beats the market over a five year period to continue to do so. Tweedy Browne notes that there is no reason a priori to expect a money manager not to continue to do so. What is interesting is that this amounts to saying that the ability to beat the market is essentially random. This of course agrees with the vast majority of evidence. For the average investor (and most people are average investors) the indexing method is best by far. This probably includes most people that consider themselves day traders. Bernstein does point out that most professional money managers use indexing for their personal portfolios regardless of what they recommend to their clients. However, I am not sure if this phenomenon has been objectively studied. The bottom line is that indexing does reduce the probability that the individual investor will be eating Alpo in his/her old age. But indexing also reduces the probability that the elderly investor will be eating caviar as well. Bernstein knows this and goes out of his way to point it out. That being said the best approach may be to index most of the money and have some set aside for stock picking or active management thereby partaking of the best of both worlds. Berstein also uses the same black magic for establishing the model portfolios that he used in The Intelligent Asset Allocator. Once again, asset allocation is shown to be as much an art as a science. Whatever turns out to be true the reader will find this to be an interesting, generally well reasoned book.

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.