@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.

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.

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.

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.

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.

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.