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moneysense.ca, 14/12/09
Book Review: The Investor’s Manifesto
![[Front Cover of The Investor's Manifesto]](http://www.canadiancapitalist.com/wp-content/uploads/2009/12/investors_manifesto.jpg)
William Bernstein says that he wrote The Investor’s Manifesto: Preparing for Prosperity, Armageddon and Everything in Between even though he swore he would never write another book after The Four Pillars of Investing (read my review) because, in his view, the dramatic market developments of 2008-09 provided a perfect “teachable” moment to clearly define a set of timeless investment principles. In this book, Mr. Bernstein starts off with an overview of financial theory illustrated with relevant bits of financial history, then takes readers on a tour of the behavioural traps they might stumble into and concludes with the mechanics of building a portfolio. If this synopsis sounds familiar, it is because Four Pillars dealt with similar themes: the theory, history, psychology and business of investing.
As you might expect of a brilliant writer like Mr. Bernstein, his writing is so quotable. Here are some examples:
“Investors cannot earn high returns without occasionally bearing great loss. If the investor desires safety, then he or she is doomed to receive low returns”.
“… the rewards of equity ownership are paid for in the universal currencies of financial risk: stomach acid and sleepless nights.”
“Much has been made lately of “black swans”: rare and supposedly unexpected events that roil society and the financial markets. In the world of finance, the only black swans are the history that investors have not read.”
“You are not as good looking, as charming, or as good a driver as you think you are. The same goes for your investing abilities. In an environment filled with incredibly smart, hard-working, and well-informed participants, the smartest trading strategy is not to trade at all.”
Mr. Bernstein is a wise investor and talented writer and while The Investor’s Manifesto is a very good book, I feel that it doesn’t quite achieve the brilliance that The Four Pillars did. If you’ve read the previous book, you can re-read it and safely skip this one. If you haven’t read Four Pillars, perhaps that’s the Bernstein book you should be reading. The Investor’s Manifesto is published by John Wiley and is listed at $29.95.
moneysense.ca, 14/12/09
[...] a strange here: Book Review: The Investor's Manifesto | Canadian CapitalistArtículos relacionados27/10/2009 — Apple Stock Down 5 Points, Investors Taking Profits? Update | [...]
“Investors cannot earn high returns without occasionally bearing great loss. If the investor desires safety, then he or she is doomed to receive low returns”
That is not true. No matter how many times you repeat it, it’s not true.
Here’s what is true: When you want safety, you must accept LOWER returns than those who accept more risk.
LOWER is not LOW. It just means reduced profits in exchange for increased safety. That’s a good trade-off for most investors.
But the passive investors of the world are unwilling to accept the truth that options work – even for passive investors.
Why is that?
Conservative, risk-reducing, strategies are available by using options.
Why don’t you hear more about these ideas? For one simple reason: Financial planners and advisors don’t understand options and cannot suggest that clients use them.
The stock market provides lumpy returns and therefore there will be occasions when equity investors bear losses or at the very least drawdowns. The more safety you require the lower the returns you are likely to achieve (think of the guaranteed return financial products that are available).
It was this type of investor psychology that Bernie Madoff played on. His customers loved the consistent returns they thought they were earning year after year. As Buffett says, most investors would choose a 12% smooth return over a 15% lumpy return.
I invest in leveraged ETF’s and am therefore very familiar with lumpy returns. My performance results thus far have been excellent but it isn’t an investing methodology that is for everyone.
Thanks for the review CC.
It’s funny how tastes differ: I found Berenstein a tedious writer, and I barely made it through The Four Pillars; I disliked the book enough that I sold it as soon as I was done reading it! I totally agreed with his conclusions, I was just put off by his writing.
Another quibble:
“In the world of finance, the only black swans are the history that investors have not read.”
I don’t think that’s true either. Random events are by nature unpredictable: you can predict their probability but you can predict when they will occur or how significant they will be. No reading of history will truly prepare you for them; it can only give you an idea of the odds.
When you flip a coin, you know that it has a 50 percent chance of coming up heads and a 50 percent chance of coming up tails. But it is impossible to predict what the next flip, or the next 500 flips, will bring. You could have 500 heads in a row. History doesn’t prepare you for that possibility.
How was the self promotion in this book? I find that most finacial paper authors use their books as a marketing medium. “This book is great, but if you really want to succeed you may want to purchase my…” Too much of that has made me put down a number of books.
Agree Smac20 – that is often the case. There is often an underlying hitch.
I also agree with Wolfinger… “Investors cannot earn high returns without occasionally bearing great loss. If the investor desires safety, then he or she is doomed to receive low returns” – You’re right Wolfinger – that is not true. The two sentences are separate topics.
You do not have to bear great loss to experience great returns, or the potential thereof.
And, I remember days of safe GICs earning double digit % returns…
Such generalizations get investors into a heap of trouble… Some basic trading principles can help minimize risk and maximize returns when used with discipline.
@Doctor Stock: I remember days of safe GICs earning double-digit % returns too, but inflation was in the double digits then too. A GIC earning 1% today with inflation at near 0% actually gives you a better real return than a GIC earning 10% did back in the 1980s.
By the way, in my previous post above I wrote “can” when I meant “can’t” — the sentence should have read: “you can predict their probability but you can’t predict when they will occur or how significant they will be.
@Mark: I don’t think Bernstein is saying anything other than risk and reward are inextricably linked. I cannot comment knowledgeably on options strategies… I still have to read your book!
@brad: Funny, I do find Bernstein very readable. But I didn’t like that this book simply seems like a slimmed down version of FP.
@Smac20: I don’t think Bernstein is selling anything. IIRC, I think he offers financial planning services but he isn’t trying to upsell something to readers.
@Doctor Stock: As brad points out, you have to look at asset class returns in real, inflation-adjusted terms. Risk-free assets have very low yields today because inflation is very low. In the past, they had much better yields because inflation was much higher. Risk / reward were still very much linked back then.
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