BROADCASTS.com

The 4 Pillars of Investing: The Book by William Bernstein

The Real Estate Show Shares a classic book called The 4 Pillars of Investing. While it is geared towards equity and stock investing, it does talk about the concept of investing as a broad approach. The Book by William Bernstein is definitely worth the read, and is widely regarded as a good starting place for the average investor. Mostly, I think it sets a good foundation for the expectations and realities of what investing is all about. Click on the link above to hear the show in its entirety, however below is a short, very short summary, an excerpt, actually, of what the book is about.

Pillar One: Theory The most fundamental characteristic of any investment is that its return and risk go hand in hand. As all too many have learned in the past few years, a market that doubles rapidly is just as likely to halve rapidly, and a stock that appreciates 900% is just as likely to fall 90%. Or that when a broker calls suggesting that the price of a particular stock will rocket, what he’s really telling you is that he is not overly impressed with your intelligence. Otherwise, you would realize that if he actually knew that the price was going to increase, he would not tell it to you or even his own mother. Instead, he would quit his job, borrow to the hilt, purchase as much of the stock as he could, and then go to the beach. The first, and most important, part of the book will survey the awesome body of theory and data relevant to everyday investing. Don’t be daunted by this; my primary mission is to present this information in terms that you will find both understandable and entertaining. We’ll learn that: • Whether you invest in stocks, bonds, or for that matter real estate or any other kind of capital asset, you are rewarded mainly for your exposure to one thing—its risk. We’ll learn just how to measure that risk and explore the interplay of risk and investment return. • Over the long haul, it is not that hard to measure the probable return of different kinds of stocks and bonds; yet even well respected experts usually manage to do a bad job of this. • Almost all the differences in the performances of money managers can be ascribed to luck and not to skill; you are most certainly not rewarded for trying to pick the best-performing stocks, mutual funds, stockbrokers, or hedge funds. • The biggest risk of all is failing to diversify properly.

• It’s the behavior of your portfolio as a whole, and not the assets in it, that matters most. We’ll also learn that a portfolio can behave in ways radically different than its component parts, and that this can be used to your advantage. The science of mixing different asset classes into an effective blend is called “portfolio theory” and occupies center court in the grand tournament of investing.

Pillar Two: History: It is a fact that, from time to time, the markets and investing public go barking mad. Of course, the madness is obvious only in retrospect. But a study of previous manias and crashes will give you at least a fighting chance of recognizing when asset prices have become absurdly expensive and risky and when they have become too depressed and cheap to pass up. The simplest way of separating managers who would be suckered into the dot-com mania (or, more recently, homeowners who took out interest-only liar-loan mortgages) from those who would not would be to administer a brief quiz on the 1929 crash. Finance, unfortunately, is not a “hard” science. It is instead a social science. The difference is this: a bridge, electrical circuit, or aircraft should always respond in exactly the same way to a given set of circumstances. What separates the “hard” sciences of physics, engineering, electronics, or aeronautics from the “social” sciences is that in finance (or sociology, politics, and education) apparently similar systems will behave very differently over time. Put a different way, a physician, physicist, or chemist who is unaware of their discipline’s history does not suffer greatly from the lack thereof; the investor who is unaware of financial history is irretrievably handicapped. For this reason, an understanding of financial history provides an additional dimension of expertise. In this section, we’ll study the history of finance through the widest possible lens by examining: • Just what the centuries of recorded financial history tell us about the short-term and long-term behavior of various financial assets. • How, from time to time, the investing public becomes almost psychotically euphoric, and at other times, toxically depressed. • How modern investment technology has exposed investors to new risks.

Pillar Three: Psychology Most of what we fondly call “human nature” becomes a deadly quicksand of maladaptive behavior when allowed to roam free in the investment arena. A small example: people tend to be attracted to financial choices that carry low probabilities of high payoffs. In spite of the fact that the average payoff of a lottery ticket is only 50 cents on the dollar, millions “invest” in it. While this is a relatively minor foible for most, it becomes far more menacing as an investment strategy. One of the quickest ways to the poorhouse is to make finding the next Microsoft your primary investing goal. Only recently have academics and practitioners begun the serious study of how the individual investor’s state of mind affects his or her decision making; we’ll survey the fascinating area of “behavioral finance.” You’ll learn how to avoid the most common behavioral mistakes and to confront your own dysfunctional investment behavior. You will find out, for example, that most investors: tend to become grossly overconfident. Systematically pay too much for certain classes of stocks. Trade too much, at great cost. Regularly make irrational buy and sell decisions.

Pillar Four: Business Investors tend to be touchingly naïve about stockbrokers and mutual fund companies: brokers are not your friends, and the interests of the fund companies are highly divergent from yours. You are in fact locked in a financial life-and-death struggle with the investment industry; losing that battle puts you at increased risk of running short of assets far sooner than you’d like. The more you know about the industry’s priorities and how it operates, the more likely it is that you will be able to thwart it. The brokerage and mutual fund businesses form a financial colossus that bestrides modern financial, and increasingly, social, and political life. (If you doubt this, just turn on your television and time the interval between advertisements for financial services.) In the book’s penultimate section, then, we’ll examine how the modern financial services industry is designed solely to serve itself, and how it: • Exists almost entirely for one purpose: the extraction of fees and commissions from the investing public, and that in fact, we are all locked in a constant zero-sum battle with this behemoth. • Operates at a level of educational, moral, and ethical imperatives that would be inconceivable in any other profession. A small example: by law, bankers, lawyers, and accountants all have a fiduciary responsibility towards their clients. Not so stockbrokers.

IOnly after you’ve mastered these four areas can you formulate an overall investment strategy. Only after you’ve formulated a program that focuses on asset classes and the behavior of asset-class mixtures will you have any chance for overall success. A deficiency in any of the Four Pillars will torpedo this program with brutal dispatch.

In Conclusion Although I hope that I’ve conveyed my enthusiasm for financial theory, history, psychology, and strategy, I’ll freely admit that I’ve been dealt the short straw in the subject scintillation department—this book, after all, is not a bodice-ripper or a spy thriller. There is no arguing with the fact that some areas of finance can be damnably opaque, even to cognoscenti. This book, then, should be consumed in small bites, perhaps ten or twenty pages at a time, preferably first thing in the morning. Lastly, while I’ve tried to make this work as comprehensive and readable as possible, no one book can claim to be an all-encompassing source of investment instruction. At best, what is offered here is a study guide—a financial tour d’horizon, if you will. Personal finance, like most important aspects of life, is a never-ending quest. The competent investor never stops learning. As such, the most valuable section is the reading list of the end of Chapter 11. Remarkably, eight years after this book’s original publication, it survives with only one change, which is to update the latest edition of Jack Bogle’s amazing Common Sense on Mutual Funds. This list should guide you through the subsequent legs of the life-long journey towards financial self-sufficiency.
(End of Excerpt)

Learn more about Real Estate Investing and learn HOW by listening to The Real Estate Show with Eric Willner , Live every weekday morning at 8 o'clock (EST) on Florida's Money Talk Radio station WSBR AM740, FM 96.9, and FM 103.9. Then contact us at 888-595-7779 to see how we can help you with your real estate goals. You can also hear us on the free apps: iHeart Radio and TuneIn and the WSBR AM740 app. If you miss the live show, Recorded Rebroadcasts are available 24/7 on Facebook.

Please share our Facebook updates and listen to the rebroadcasts on demand on Facebook.com/TheRealEstateShow

AutomaticLandlord.com
MackBuysHouses.com to sell real estate fast for cash
MackSellsHouses.com to buy great investment property
MackBargainHouseHunters.com to partner on real estate deals you find

#TheRealEstateShow, #EricWillner,
#WSBR, #AM740, #FM 96.9, FM 103.9, #TheRealEstateLife, #speakingempire, #GKIC, #makeamericagreatagain, #propertymanagement, #rent, #camerondunlap, #bestjobontheplanet, #economy, #housing, #realtors, #GDP, #creditkarma