Four Pillars of Investing Book Review

A must read for everyone - this book is a core reading to establish how to invest your money as a laymen. It is divided into 4 sections, each a fundamental part of becoming a successful investor.

The 4 Pillars of Investing:
Theory - The author first goes into the basic theory of investing and the efficient market theories. Its a very good overview of risk vs return, the importance of asset allocation, and why you can't beat the market.
History - The next part of the book gives an overview of the history of investing. I probably took the most away from this section of the book. The author covers manias like the the Diving Mania in the late 1600s, the South Sea Bubble, and the Go Go market of the late 1960s. This section peaked my interest about learning more from the history of investing to improve my resolve in today's investments. The author has some additional reading recommendations to learn more about past events that I plan to pick up.
Psychology - The author covers common psychology for the average investor -- overconfidence, chasing trends, risk aversion, and investing in the next big thing. I think it was pretty obvious stuff, but the author was able to organize it in the way that tied well with the other fundamentals covered in the book.
Business - Finally the author covers the financial service industry. Kudos to the author for spelling it out - bottom line, the financial services industry's ultimate goal is to take your money. He recommends low cost index funds from a few large companies (primarily Vanguard).

Perhaps a unique twist on this was I read this book at the same time as I was listening to Rule #1 Investing by Phil Town. They basically on are opposite sides of the investing spectrum - Four Pillars of Investing touts the Efficient Market Theory (EMT), while for the most part Phil Town's investment technique is built on Ben Graham value investing theories with some technical analysis built in. I found myself one day agreeing with sections of Four Pillars and the next reading Phil Town's book and recalling key points of the "Intelligent investor" by Ben Graham that contradict some of the market generalizations in the Four Pillars. Back and forth it went.

After some reflection I believe both theories are reflected in the market- in general the EMT is sound and most of the time Mr Market gets it right. This means for any investor who cannot systemically beat the market, they will likely have better performance in the long term by following the recommendations of Four Pillars. However, I take issue with the assertion in the Four Pillars that the success of value investors such as Warren Buffet is merely by random chance. Its clear to me that for some, systematic success through value investing is achievable.

The question for me is can I systematically beat the market performance with my value investments? My current track record (albeit short term) says no - for the last 2 months I have trailed passive indexes.

The Four Pillars of Investing is a must read book for everyone - especially if you haven't read a good book on EMT. Overall its advice is excellent and the majority of individuals should follow it. Even for those folks who think active investing is the way to go this is a must read to understand the other viewpoints.

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Comments (5)

This book is a good fundamental primer on 2 factor (risk/return) modern portfolio theory, which dates back to Markowitz in the 1950's.

For more cutting edge (21st century) thinking about retirement investing using financial derivatives and inflation-indexed bonds see Zvi Bodie here:

(no, Zvi doesn't pay me a fee to tout his ideas, but maybe he should)

Generally it is thought that MPT based investment is too risky for retirement funds, because an older individual with limited time to recoup losses cannot take a 30% hit to her/his portfolio later in life. The inflation-based investing option has much less risk and a slightly lower return tradeoff.

Like everything in life, if you plan carefully and well ahead of your goals things are easier. If you leave things to the last minute, you will likely not be as successful.

Bernstein's book is an investing Bible. Must read for someone who wants to learn about investing. ETFNerd is correct in that it is based on traditional Modern Portfolio Theory. I also like Zvi's ideas which combines MPT with options, but this book builds a foundation for someone. They won't understand Bodie's work without understanding this first.

The Four Pillars book is great, though I also enjoyed the quantitative elements of Berstein's earlier book, The Intelligent Asset Allocator. Reading both books, along with David Swensen's Unconventional Success, about the rip-offs of the mutual fund industry, has prompted me to shift to a passive index-fund approach and to move my assets from Fidelity and Schwab to Vanguard.

index funds may be the best choice for many individual investors but EMH and MPT are based on quite a few unrealistic assumptions that never hold true in financial markets.

Also for the retail investor to think that he can beat all those hedge funds, prop trading firms, and investment banks over the long term is ridiculous, it is the equivalent to believing that one could build a better search engine than google in his free time.

yes, totally agree with you, everyone should read it! As well as "The Birth of Plenty" also by Bernstein. I am currently reading "Naked Economics" also very good!

The more one understands the fundamentals of economics (macro and micro) the more one understands capital markets and how to piece everything together (and by "everything" I mean those facets of life that are monetary driven).

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