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Book Review: Four Pillars of Investing


There is a famous Zen story. One day one person was traveling through the mountains and he came across a lake. There was a monk sitting and meditating. The face of the monk looked very peaceful and tranquil. The traveler exchanged greetings with the monk and asked “What is the secret of your mental peace?”

“The secret of my mental peace is that I have realized there is no secret, and I have stopped looking for all secrets.”

The book “Four Pillars of Investing” sends out a clear Zen signal for the financial world. There is no such thing as forever successful stock picking strategy or eternally successful manager. There is no such thing as correctly timing the market continuously for long term. Past performance is no guarantee of future success.

Still a lot of people make big money in stock market, so there must be some successful strategies, right? Perhaps William Bernstein’s answer is that the only successful strategy is to exploit the ignorance of those who don’t understand that there is no successful strategy.

Some of you are bound to ask “But my mutual fund is beating S&P 500 by a wide margin for last 10 years.” Here we must understand one thing. When Bernstein says “long term” in his argument, he is talking about 30 or more years. And as he shows, indeed there is no one who has outsmarted the market in the long run. The market beat them all. The best returns are given by S&P 500 over the long course of history.

What about Warren Buffet and his alikes? Well, yes. Warren buffet has had a long streak of continuous success. But his success gets a lot more publicity than failures of many people who tried to be like Buffet. This due to what Bernstein describes as survivor bias. People are charmed more by rags to riches stories than the other way round.

The book provides lots of great examples, scientific research references and tries to drive home the fact that no matter how smart financial person you are, you cannot beat the first principles and basic laws of economics in long term and on large scale.

But you find people trying to make you believe that it is possible to outsmart these first principles, it is possible to outwit the stock market. Why? Because stock market is a business and unless you believe that you can outsmart and outwit the stock market, this business will not be able to sell you their products.

Pretty much every workshop and seminar on stock investing starts with a chart. This chart is used to show people that over the course of last 80 years, stocks have been the best investment compared to bonds, gold etc.

Interestingly, these charts always start at the year 1929, immediately after the great stock market crash, when the market was at its lowest. And the chart shows only US stock market. If you see the chart beginning in say 1920, or if you see some other stock markets, you see a totally different story.

Overall, this book is highly recommended reading. If you are investor like me, it will greatly reduce your investing anxiety and you will start focusing on fundamentals and on the first principles.

Some topics for you to google before you go to this book – Irving Fisher, Fama and French, Efficient Stock Market, Gordon growth model, dividend discount model.

One Response

  1. In investments,number of successes are not counted but end result is counted.So even if you lose 50 times and win 2 times but win big time,you are a success.

    You can win 100 times but you can lose that all in 1 session.

    Most foolish strategies may give you best returns and you will be touted as investment genious and next day you are wiped out..Just as US investment banks.If you become very successful by leveraging profits you can be a disaster by leveraging losses.

    Thats is why success should not be judged by comparing with best returns.Most probably it is extremely risky postition.

    Always keep basics right and be happy.

    As i look at it,if you limit losses then you can keep on losing till you win really big.
    One can leverage profits at the same time not leveraging losses. i.e. Option trading.Loss is confined to Premium paid.Profit is on underlying security.
    Do not trade on margin money.Do not trade on borrowed money.As you are leveraging losses.If you leverage 10 times,10% losses are sufficient to wipe you out.

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