In just under 200 pages, The Investor's Manifesto gives you everything you need to manage your investments:
* A historically grounded discussion of the tradeoffs between risk and return,
* How to design an investment portfolio using index funds, including advice on withdrawal rates and how (and how often) to rebalance,
* A good discussion of human psychological biases (the author uses the wonderful phrase "investing psychopathology" to describe this topic), and
* How to navigate the financial services industry without getting your head handed to you.
Finally, there's a chapter that summarizes everything, followed by a solid reading list for continuing your investment education, broken down by topic: theory, history, psychology, and business.
Anyone wanting to reach a reasonable competence level in investing should read at least one of William Bernstein's books. This one or The Four Pillars of Investing will suffice. Since he's not a Wall Street guy--he's in fact a neurologist--he describes things clearly, accessibly, and without jargon. At the same time his books aren't dumbed down like most mass-market financial literature.
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Note that Bernstein prescribes low-fee index funds, and The Investor's Manifesto avoids the entire subject of how to pick stocks. This is a different genre of investing literature compared to stockpicking-oriented books like The Dhandho Investor (which covers specific ways to find good value stocks) or Investing Through the Capital Cycle (which covers business cycle impacts on individual stocks and sectors). Interestingly, books like Cramer's recent How to Make Money in Any Market advocate a hybrid approach of half indexing and half stockpicking.
Of course, either way works, although most people would do far better indexing. It's just... easier, on several levels. And not least that indexing protects you from deluding yourself that you'll "beat the market" when you won't.
One extra thought: It's interesting to watch Bernstein basically admit early on in this book that most people simply can't manage their own money. He doesn't want it to be true--neither do I--but yet it is. Most lack the patience and temperament. They demand investing to be "fun" and "not boring" or they won't do it. I'll go still further: most investors lack the executive function and the discipline to invest competently, and when things get stressful, like during periodic market crashes, they lack the emotional continence to stay the course.
Ironically, The Investor's Manifesto came out in 2010, while the rubble was still bouncing from the 2008-09 great financial crisis. And I'll confess, I had my own continence issues during those years too.
[Readers, what follows are my notes and reactions to the book--they are here to help me order my thinking and better remember what I read. Feel free to skim the bolded parts. Life is very short!]
Notes:
Forward (by Jonathan Clements)
ixff "Because [Bernstein] had turned his considerable intelligence to the financial world relatively late in life, he had enthusiasm and insights that eluded the rest of us, who had grown jaded from watching the Wall Street money-go-round for too long." Comments here on how the 2008-2009 financial crisis is a great teachable moment [he uses the present tense "is" because this book came out in 2010, right afterward]. Clements also adds "many of us are not as brave as we thought." [Note that Jonathan Clements passed away in 2025 at age 62 from a rapidly progressing cancer. You can read more about his life and work on his site Humble Dollar, which is still active.]
xff Mostly sensible comments here from Clements on housing: homes will not pay for retirement; how the financial crisis killed off the notion that "you can't go wrong with real estate." [Note today's era, however, where post-COVID inflation shock drove home prices much higher. Your home sort of protects you from inflation, sort of--keep in mind the cost structure involved in keeping that house also goes up with inflation. And to have your home pay for retirement, you'd have to figure out some kind of huge geographical arbitrage--which would mean moving away from where you live to someplace waaaay cheaper.]
xiff Comments here discouraging readers from using recent great investment returns as a reason to cut back on savings; great returns can be followed by lousy returns. And then finally an understandably snarky remark here about "smart money" that didn't seem so smart after the GFC.
Preface
xiiiff "I had said most of what I needed to say about finance in my first two books. Until now. The financial meltdown of 2008-2009 drastically changed the investment landscape, and if there ever was a time to leapfrog my previous books, it is now. This is a teachable moment, and I intend to use it to clearly and concisely enunciate a set of timeless investment principles." Comments here on Benjamin Graham's book Security Analysis, published in 1934, recommending at least a 50/50 stock/bond split; note that a 50/50 breakdown is seen as conservative today, but back then [during/after the Depression] was seen as "certifiably reckless."
xiv [Here is what turned out to be quite a predictive quote, as I'm reading this book 15 years after it was published]: "As in the depths of the Great Depression, there are now generous returns to be had for the brave, the disciplined, and the liquid." [The key is you have to be liquid, but of course being liquid carries a cost (of foregone returns) when times are good, and that's too painful for people!]
xivff The author used to think that anyone given the right tools can handle investing; now realizes he was wrong: only a tiny minority can do it. People need to have 1) an interest in it, 2) some math competence as well as some understanding of probability and statistics, and 3) they need to know their financial history. He states [correctly] that even financial professionals don't even know their financial history [I would add in addition you need to know your monetary history, and this is something that absolutely nobody in Wall Street really knows. Nobody knows this!]. Finally 4) people need to have emotional discipline to execute a plan/strategy. [Emotional continence is a superpower.]
xvii Interesting comment here about how this book is written with a great deal of cognitive dissonance: the author loves to write about investing, he wants to help people to do it themselves, but he has finally accepted the truth that most people can't. He writes about how he's disappointed with his first book The Intelligent Asset Allocator which got a good reception from academics and general readers, but his friends and family members thought it was "boring." [Fascinating that there's an implicit expectation that something as important as protecting one's family's capital has to also somehow be "fun" or "interesting" too. It's amazing the demands we place on reality.] His second book The Four Pillars of Investing targeted at the average liberal arts graduate, but then he got feedback about the excess complexity of his charts, graphs and examples. This book he wants to be accessible to everyone, to the point where whenever there's any math, he separates it into a separate boxed section.
xviiff On the book's road map: the first three chapters explore the theoretical basis of investing and designing portfolios, along with a discussion of financial history. Great quote here on how an investor needs to observe extraordinary current events and be able to say, "I've seen this movie before, and I know how it ends." Also on knowing that calamities can and will occur from time to time.
xix The fourth chapter is about dealing with human nature and "investing psychopathology" [great phrase] like overconfidence, recency bias, and the delusional optimism that most individual investors have--both about their presumed (out)performance relative to the market, and to the market's performance relative to history.
xxiff Chapters 5 and 6 focus on dealing with the investment industry to execute strategies. "Whether investors know it or not, they are engaged in an ongoing zero-sum, life-and-death struggle with piranhas, and if rigorous precautions are not taken, the financial services industry will strip investors of their wealth faster than they can say 'Bernie Madoff.'... the waters are more dangerous than they have been in living memory, but, by the perverse calculus of finance, they should also be more rewarding."
Chapter 1: A Brief History of Financial Time
1ff The author is chatting with a colleague during the market peak in 2000 and the colleague is asking a meta-question: whether investors are really smart or really stupid during this euphoric period. In technical terms he's asking whether they're being "smart" by assuming stock prices will reflect a lower equity risk premium going forward, or "stupid" in that stocks are really overvalued and they're just FOMO-ing in to them with everybody else. Of course by 2009 investors finally were fully aware of financial risk.
4ff Discussion of the supply and demand of capital and money, which is measured by the interest rate; the central idea here is for every "consumer" of capital there is more or less a "provider" of capital; the discussion switches from debt financing to equity financing; arguing that the cost of capital is the same as the return to the investor and thus the investor needs to understand the risks and rewards of consumers of your capital [in other words the stocks that you invest in.] On how equity holders get the residual after debtholders are paid, thus the equity return ought to be higher on average than what the bondholders are paid.
5 "...a substantial return premium should be demanded by equity owners.
6 interesting nuggets here on some of the early history of equity ownership: citing in AD 1150 a water mill in southern France where ownership was divided into shares; note also that the first joint stock companies didn't arrive until the [relatively late] medieval period.
6ff And then on the English and Dutch East India companies in the 17th century. Also interesting comments here on the corruption of Queen Elizabeth's government; also on the fact that English East India Company was unable to borrow at any cost [England had far more immature capital markets than the Dutch had at the time], thus it had to issue equity shares to raise money, doing so over and over again for each annual expedition. But each of these expeditions proved hugely successful, paying 100% returns or more. By contrast the Dutch East India Company could float stock in the form of permanent capital rather than on a per voyage basis. The English company had a much higher "equity risk premium" than the Dutch company for a variety of reasons.
8ff On the first Italian city-states that formed after the collapse of the Roman Empire, beginning in the 5th century AD; note Venice and its use of the prestiti, forcing wealthy citizens to purchase bonds issued by the city-state yielding 5%, which was below market interest rates, the prestiti bonds evolved into sort of a proto-modern bond market as the Venetian treasury allowed owners to register these bonds in other people's names, thus a secondary market arose in prestiti.
9ff Note the chart here of historical prestiti prices, ranging from nearly par to as low as 20% of par [see photo below]; see the relative tranquility for the first 75 years, followed by a collapse during the catastrophic 1377-1380 Venetian war with Genoa. The issue here was not military defeat but it was a fiscal shock because the Republic suspended interest payments and also issued a massive amount of new bonds to fund the war. [War always drives inflation!!!] Thereafter interest rates stayed high and the prestiti prices stayed low for nearly a century, until 1482 when the Venetian Republic was able to refinance its debt.
Chapter 2: The Nature of the Beast
[This chapter has lots of insights, but it gets bogged down a bit in trying to forecast in some general sense what forward returns will be for stock and bond markets. I think it's much more useful to just say "I don't know." The author's idea here, and it's a reasonable idea, is to look at recent bond yields and compare them to inflation; and then look at the dividend yield on stocks and compare that to the yield on bonds. The idea is to make a comparison between riskier stock assets and lower-risk bond assets.]
14ff Cute story here about the "raven of capital market disaster" sitting on your shoulder as you revel in the great stock market returns of the late 1990s. The raven tells you there will be not one but two historic market collapses in the next decade, 2000 and then 2008, and they will be two of the five worst bear markets in the past century.
15ff Note the chart here on page 15 showing market returns during the tech crash and the GFC and then looking at the full decade that included both crashes. It shows strikingly positive performance in certain sectors despite both downturns: see for example value stocks, REITS, international stocks, emerging market stocks and bonds all outperformed during the downturns, but underperformed almost all markets across the entire decade.
17 A great point here that the author mentions very briefly: how people foolishly dream of beating the markets by (somehow magically) getting out of all their stocks right before a crash; the author talks about how you're then faced with a problem of when to buy back in. [This is worth much more discussion (but it's probably beyond the scope of this book) but once you sell all your stocks and are totally out of the market, what if you're wrong about a crash coming? What if it doesn't come? You will end up having to buy back in at much higher prices, and ironically this makes it all the more likely you'll be buying in right before the next crash! The "when do I get back in problem" is usually catastrophic for people.]
17 Another good reminder here in this quote: "Investors who can earn an 8 percent annualized return will multiply their wealth tenfold over the course of 30 years." [The human brain does not handle compounding/nonlinear math very well: compounding consistently surprises people. You want to think in terms of the rule of 72, think in terms of doubles, and also think in terms of adding a zero to your net worth via compounding over an investing career.]
19ff Comments here on over-reliance on historical market returns: see for example the misleading period from 1952-1981 where treasury bonds were low during a period of significant inflation, while stocks tend to do very well during long periods of inflation; thus during that period the S&P 500 returned 9.89% per year, more than 5% better than inflation over this period, while bondholders got destroyed. The author talks about how in 1982 when government bond yields were relatively high, you could reasonably estimate that future inflation would be lower than those bond yields; what followed, ironically, in the 20 years after 1982 the long treasury bond [he probably needs the 10-year here] yielded 8.66%. [This was the era that made Bill Gross and his Total Return Fund a very wealthy man.] More examples here of stock market returns: from 1926-1999 stock returns were 11.35% per year before inflation (and 8.02% per year after inflation) but from 1995-1999 stock market returns were 28.56% per year. Note also the authors' condescending reference to the book Dow 36,000. [I wonder what this author would have to say about the Dow hitting 50,000 this year.]
25ff Now on looking at stocks and trying to estimate their future expected returns by looking at the dividend yield and then adding in a growth rate of those dividends. This can be done with an individual stock or with the market overall like the S&P 500. Note the chart below of the growth rate of dividends since the late 1800s on US stocks; note also that after 1940 you have what looks like much more rapid growth but it's an illusion resulting from inflation. The author's point here is to look at the previous, more shallow slope to get a better sense of the true growth rate. [I think one additional takeaway you can make here is that dividends (and their future growth) will likely protect you very well from inflation.]
27 Note also the takeaway that dividends grow roughly about 1% per year in real (after inflation) terms. This is less than the 3% growth rate of the overall economy, and less than the growth rate of total corporate profits in real terms. This is because companies die off, they get into trouble, etc. Note also that this 1% rate includes both stock buybacks as well as dilution from new shares issued.
29ff Long extended text box talking about Irving Fisher and his way of looking at stocks using a dividend discount model. [You don't need to ingest all of this: the main, most important idea is the "Gordon Equation" which estimates the returns on stocks as the dividend yield plus the growth rate of dividends: r = y + g.]
32fd The author arrives at roughly an 8% nominal return for US/developed market stocks or about 4% in inflation-adjusted terms, something that will double (again, in real terms) roughly every 18 years.
33 Helpful comments here about REITs: because REITs have to pay out 90% of their cash flows in dividends they're required to borrow quite a bit from the bond market or from banks; this adds to their leverage and their risk, and this is why the sector massively underperformed during the great financial crisis. Note also that REIT dividend payouts fell substantially in the years after the crisis.
34 "Always favor expected returns calculated from the Gordon equation [see above] over past returns, no matter how long of a period they cover. This goes double whenever the markets are gripped by the euphoria of a bubble, as occurred in the late 1990s, or are in the throes of a panic, as happened in 2008-2009. If one of life's secrets is to keep your head when all those around you are losing theirs, then the Gordon equation is the collar that will keep it there." Note the example here of expected returns for the market in 2000 being a 1.3% real dividend growth rate plus a 1.1% dividend yield or about 2.4% in real returns, and this turned out to be predictive of the lousy returns stocks were about to offer. But then on the other side we see today [meaning in 2009-10 when this book came out] that the reverse is true: equity returns appear attractive.
35ff Comments here on real estate: that after inflation, RE returns are essentially flat or at best you could expect maybe a 1% annual real increase. The author is careful to remind readers: "Home ownership is not an investment; it is exactly the opposite, a consumption item."
37 More helpful heuristics on real estate: know the Rule of 150: this is the number of months in 12.5 years: you ask a realtor what a given house would reasonably rent for, make sure that number seems right, multiply it by 150 and this will give you an excellent idea of the home's fair market value; this is also a way for you to think about whether it's worth renting or owning a house. Another rule of thumb the author gives the reader is never pay more than 15 years' fair rental value for any residence (which works out to a 6.7% "gross rental dividend"). The author also says when the own-to-rent ratio exceeds 20 years this is a real warning that home prices are excessive. Then discussing the idea of imputed rent: when you own your own home you can think of yourself as "earning" an imputed rent that you don't have to pay, with the trade-off that you have your capital tied up in the house that you could otherwise invest; also note the good point here that the imputed rent is tax-free, it's sort of a tax-free notional cash idea. Interesting to think about this a little bit.
38ff A couple of other idiosyncrasies in equity markets where value investing and small cap companies appear to have higher returns than the overall stock market; see the work by Fama and French on this. [My own thoughts: the "small stock bias" is a less valuable theme now in the modern, corrupt era of oligopoly capitalism: you have to be gigantic in order to compete in most industries now, you have to have resources to handle extensive regulation, pay all the political "tolls" necessary to do business. Large companies now have large (and increasing) regulatory and corruption barriers to entry that limit the ability for small companies to compete. Value however is a whole other matter: the whole point of investing is to look for stocks that are priced below their intrinsic value--which efficient market hypothesis people believe can't possibly exist!]
[One more thought on value investing: a "value stock" doesn't necessarily mean cheap. It means a stock where the overall market underestimates its future earnings power. See for example Amazon, which was a "cheap" stock even though, paradoxically, it never was cheap on most valuation metrics. Thus a stock with a very high PE or very high valuation can still be undervalued if the market is underestimating the company's total addressable market, the company's future earnings power, etc. The idea here is can you find a situation where you think there are good odds that the market is misjudging the future prospects of a company?]
39 Note this other pearl of wisdom: "Good companies most often are bad stocks, and bad companies, as a group, are good stocks." [While this is a useful heuristic, note once again there are exceptions: see for example the Buffett/Munger concept of a "wonderful business" that has such good cashflow characteristics that you could buy it at a high valuation (that you might buy it at nearly any valuation). This is a major exception to the good companies = bad stocks idea.]
40ff Discussion of the small cap performance premium and challenges to it, including how there are higher transactional costs to invest, it might be an artifact of a particular period that Fama and French looked at, and then the fact that small cap stocks are riskier so really this is just the result of a higher risk premium.
42 See photo for a chart of expected real returns going forward [again this is from 2009] for different asset classes. [Once again I don't think I would trust the expected returns for "small" stocks because in this era it is a catastrophic liability to be small.]
42ff Extended section here on defining and thinking about risk: on considering "risk" to mean the number of days the S&P 500 moved up or down more than 5%. Note that this kind of move happened 18 times in the last 6 months of 2008 versus only six times in the 10 years previous! And the volatility metrics are even worse for small cap and small value stocks.
43 Note the quote in the text box on page 43: "Given a long enough series of returns and a working command of financial history, an investor can get a pretty good idea of just how risky an asset class is without resorting to higher or even lower math. That, of course, does not stop people from trying to measure it more precisely." What follows here is a discussion of standard deviation in monthly market returns. Note that stock market returns and security returns in general are absolutely not normally distributed and so sometimes you get enormous bursts of volatility, thus you can't really use Gaussian statistical methods to measure things. The author quotes Eugene Fama: "Life has a fat tail." Note also here a discussion of withdrawal rates for retirees under the age of 70: "At a 2 percent withdrawal rate your nest egg will survive all but catastrophic institutional and military collapse; at 3 percent, you're probably safe; at 4 percent, you are taking real chances; and at 5 percent and beyond, you should consider annuitizing most, if not all, of your nest egg."
46 [Another comment that proves Yogi Berra's quote that predictions are difficult especially about the future: the author talks about REITs in all probability having future returns high enough to compensate for their volatility. The real truth is that sector got annihilated by a bunch of different secular trends that nobody really expected: work from home, much greater than expected online disintermediation of retail, and also the multi-family rental space went through a deleveraging cycle. The entire world of office, retail and apartment REITs is still roiling from some of these trends.]
46ff Note the chart here on page 46 showing market returns by stock market sector from 1929-1932: all sectors were down 80% or worse. "It is obvious that few should own an all-stock portfolio." [Although it's worth noting that if we end up in a "St. Petersburg in 1914"-type situation even your government bonds are going to go to zero as well. This is where portable digital property like Bitcoin might come into play as a small component of a modern portfolio. Note that the author--as far as I can tell--doesn't think much of Bitcoin and there's obviously no mention of it in this 2010 book.]
48 "The goal is not to maximize the chances of getting rich, but rather to simultaneously allow for a comfortable retirement and to minimize the odds of dying poor." [While on one level this is useful wisdom, it's worth remembering that this is wisdom for people at a middle-class wealth tier; once you get well below a 1% withdrawal rate on your capital, certain of the standard portfolio diversification rules and stock/bond allocation rules kind of go out the window.]
49ff The author warns readers who think that they can outperform by "carefully selecting the best stocks" etc., etc., telling the reader to think through who's on the other side of their trade: like highly-informed counterparts like Goldman Sachs, Warren Buffett or--much worse--a top executive of a company who knows much more about that company you carefully selected than you ever will! Note also the extended discussion here of Eugene Fama and his work looking for profitable trading rules and his failure to find any trading rules that produced outperformance, and the incredibly unrigorous claim Fama then went on to make: that it was not possible. [Hilarious to see an academic unable to do something, and then claim that his inability is therefore proof that it can't be done.] Fama went on to invent the idea of the efficient market hypothesis.
52ff Discussion of Bill Miller and the various rich ironies about his outperformance vs the S&P 500; this was thought of as disproof of EMH, but he later blew up catastrophically during the great financial crisis, crushing his career results into overall underperformance. [Note that a rigorous reader must consider Warren Buffett's various convincing (and sometimes hilarious) rebuttals of EMH including his famous essay "The Superinvestors of Graham-and-Doddsville." Note also Buffett's famous quip that "it is an enormous advantage to have opponents who have been taught that it's useless to even try." And then also his comment (I'm paraphrasing) that efficient market theorists confuse a market from being mostly efficient to being always efficient.] [Also regarding Bill Miller, I don't know him personally but allegedly he developed a drinking problem at some point during his investing career.]
53 More comments here on how investors piled into Bill Miller's fund towards the end of his period of outperformance, and thus got stampeded by his underperformance right after. The author also talks about another superstar manager (now forgotten, they often are totally forgotten) named Robert Sanborn who basically did the same thing.
54 Various problems that cause fund managers' underperformance:
* Management fees (1% or more and 1.75% in the case of Bill Miller's fund)
* "Asset bloat" (where you attract so many assets you can no longer find stocks to buy without moving those stocks' prices up significantly--and once you're done buying the price falls right back to baseline. Worse, the opposite effect happens when you're selling! You crush the price as you're selling and then it rebounds back to baseline after you're done)
* Transaction costs.
54ff Discussion of Buffett as the exception: the author talks about how he has a control premium for most of his investments since he usually buys entire companies; also that there's "Buffet premium" that goes into any investment he makes. [This is a weak rebuttal of the Warren Buffett phenomenon.]
55-6 Also a discussion of the investment newsletter industry: a study done by two finance academics Campbell Harvey and John Graham finding very few newsletters actually beat the market at all, the only idiosyncrasy they found was you could outperform by picking the worst performing newsletters and do the opposite of what they recommended.
56ff Discussion here of Jack Bogle and the revolution of the Vanguard Index fund. [Note the offhand mention of Bogle's later conflict with the Vanguard board's leadership: it sends the reader down a rabbit hole about how the next leaders wanted to create more products, increase Vanguard's market dominance, do a bunch of BHAG-type goals, etc., all of which grossed Bogle out.] Fun also here to read about Bogle's career, where he started at Wellington Management during the 60s era, when everybody put "tronics" on the end of their company name [just like .com]; later, when Bogle got fired from Wellington Management he actually convinced the directors of the fund he was managing to declare independence from Wellington Management! He was a student of the Investment Company Act of 1940, it was the subject of a senior thesis and he used it to take the fund with him, and this is how he founded Vanguard. Super interesting. And even more interesting: he structured Vanguard as a sort of co-op where the fund shareholders actually own the funds, thus the profits from those funds would flow back to the shareholders themselves: it was essentially a non-profit organization or like a mutual insurance company, and at the time it was a unique structure in the investment industry. Then he started an index fund calling it the Vanguard 500.
58ff Note the commentary here about the costs involved in matching an index fund to the index, especially with high-turnover indexes like the Russell 2000; there's front-running, people speculating on which companies will be added or dopped; contrasting this to a passively managed fund which has lower turnover like the model of Dimensional Fund Advisors for example. And then there's the total market index which has almost no turnover: see for example the Wilshire 5000 or Fidelity or Schwab's total market index ETFs.
60ff The author goes through the Jack Bogle argument against fee-bearing mutual funds [you can find this in any of Bogle's books, see for example the useful Common Sense on Mutual Funds], walking through the various costs that plague an actively managed fund: expense ratios, commissions, bid/ask spreads, taxes (especially in a high turnover fund), and other impact costs; in emerging markets funds you can potentially pay up to 9% in aggregate per the author. "Performance comes and goes, but expenses are forever."
61ff A section here giving various rationalizations for traditional fee-based mutual funds followed by responses from the author: see for example in certain markets like small cap stocks or foreign stocks you need a stock picker: the author responds that expenses are even higher for those products; also on the argument that an index fund "dooms you to mediocrity": the author responds this is true only if mediocrity is defined as beating 60 to 80% of the competition in the long run. [Good one!]
63ff Very brief mention here of survivorship bias in the mutual fund industry [this is worth more discussion than the author gives it: the amount of performance distortion survivorship bias creates in the mutual fund industry is significant. Note also the discussion here of luck versus skill: you just don't know which is driving a manager's performance, sometimes for years.
64-5 Finally comments here on the enormous advantage of bond index funds: since the range of possible outcomes in bond investing is much more limited, reducing costs is a much bigger driver of outperformance.
65 In the chapter summary here the author reminds the reader that "The investor cannot learn enough about the history of stock and bond returns."
Chapter 3: The Nature of the Portfolio
69ff The author opens with a discussion of the Japanese stock market in December of 1989, the Nikkei peak, describing how over the next 19 years the Nikkei was down 40% even with dividends reinvested; if you used a 5% withdrawal rate you would run out of money by 2002. Had this investor owned bonds--or better yet invested in the US or European stock markets--he would have survived.
71 Four essential preliminaries:
* save as much as you can,
* make sure you have a liquid emergency fund,
* diversify widely, and
* do so with passive or index funds.
"If you cannot save, do not waste your time on this book... If you cannot defer current consumption, you will die poor."
73 Interesting comment here about the idea that you can get adequate diversification by owning 15 or 30 stocks; the author argues this is true in a narrow statistical sense because the volatility will be about the same as the overall market but a smaller portfolio will have a much wider range of possible performance; there's a study here of 1,000 random portfolios of 15 stocks each, that over 30 years had a range of anywhere from 2.5x the market to as little as 40% of the market's return. In other words returns will be volatile even though the "volatility" looks similar to the market.
74 Discussion here on an allocation decision between stocks and bonds, and then allocating the stock asset class among types of stocks.
76 Note the interesting way to think about a younger worker here where he could think of his work as a sort of large bond-like asset ("human capital") which produces work income, therefore they can own a much higher percentage of stocks in their investment portfolios; contrasting this to a retired person who isn't working and therefore doesn't have this income, thus who would want to flip his portfolio the other way. [Interesting conceit here.]
76-7 Also note this quote from Fred Schwed from his book Where Are the Customers' Yachts? describing what it's like to live through a really bad bear market: "There are certain things that cannot be adequately explained to a virgin either by words or pictures. Nor can any description that I might offer here even approximate what it feels like to lose a real chunk of money that you used to own." The author follows up here by saying "by 2009, nearly all investors had lost their virginity" and those people can now accurately understand their risk tolerance; also he argues you can judge by your behavior after 2009: did you sell, hold steady, buy more... or buy more and hope for even lower market prices? This gives you an idea of your risk tolerance as well. [I like to tell people that your risk tolerance is a lot lower than you think it is.]
77ff On the bond allocation rule of thumb that your bond exposure equals your age: thus the 20 year old is 80/20 stocks/bonds, and an 80 year old is 20/80; the author also says that you can add 10-20% to the stock component based on your risk tolerance or lack thereof. So a 50 year old could be 30/70 or 70/30 if he's very low or very high in risk tolerance. Note that there are problems with this idea: you end up rotating from stocks into bonds as you get older, giving up your step-up in basis to your heirs; also at a certain level of net worth it doesn't really matter what your ratio is as long as you have plenty of liquidity to cover all your costs for the rest of your life. The author gives an example here of an 80 year old who lives on less than 1% of a portfolio: she can be much more aggressive and should think of the portfolio belonging to her heirs instead of herself; in contrast, a 70 year old with a much higher withdrawal rate can't do this.
80 "Long and deep market declines are wasted on the young. Although they should be heavily invested in equities, they are usually too frightened by their first encounter with the bear to buy. Equally, bear markets are wasted on the old, whose lack of human capital and the fact that they are drawing down their portfolios dictate a low equity exposure."
80 Comments here about the "equipoise point": during a bull market you are going to derive pleasure from your stock gains but also regret that you are not more heavily invested. "Your equipoise point is that allocation in which this pleasure and regret exactly counterbalance each other. Similarly, during substantial market declines, the equipoise point is that allocation where the pain of loss in stocks exactly counterbalances the warm fuzzy feeling provided by your bonds and the capacity they provide to buy more stocks at low prices."
83ff Text box here on Harry Markowitz's work on mean-variance optimization and the idea of the efficient frontier--a portfolio that optimizes risk and return. Again this gets into pointy-headed academic stuff, but the author talks about this just as a teaching tool to think about achieving decent returns with relatively low risk.
85ff Note the benefits of rebalancing here: a 50-50 mix of large cap stocks and REITs showed more than 1% point of outperformance compared to each asset by themselves over the period 1995-2002; the outperformance comes from rebalancing, because rebalancing means you are consistently buying an asset class after it has declined and trimming an asset class as it goes up. Most of the time rebalancing improves returns while also providing a smoother ride. The author calls it a free lunch. Note that there are exceptions: for example during a very long-term decline in one market you'll be rebalancing into something that will continue to decline in the future; for example if you were rebalancing between Japanese stocks and US stocks in 1990 and beyond, this would actually harm your returns as you'd be buying more and more Japanese stocks all the way down. But this is a caveat.
89ff The author gives an easy breakdown of how to divide up your stock component once you've chosen the stock/bond allocation. He suggests the simplest is a 70/30 split of the total US stock market versus the total foreign stock market. "That's it. Done... Over the next few decades, the overwhelming majority of all professional investors will not be able to beat it." The author offers a few extra nuances here: perhaps adding REITs for 10% of the equity allocation (thus this would be 6% of a 60/40 stock/bond allocation) and possibly breaking the foreign stocks into developed versus emerging market stocks, since those two submarkets have very different returns. Finally another nuance: he suggests perhaps adding exposure to value stocks or small cap stocks. Also note other nuances, such as the fact that the total stock market fund will already contain REITs, but these are minor concerns.
91 For a larger portfolio ["in excess of $250,000-$500,000"] the author suggests the so-called "four corners portfolio," see photo below. [Note that for most people this would be an over-engineered and overly complex portfolio. But it is helpful to see his different examples and how he goes through picking them out.]
Too much. Too over-engineered.
92 Finally a section here on what else is out there, on what other asset classes you should consider: the author talks about potentially considering commodities futures, but he says that he does not trust any of the commodities funds or the companies offering them. A second example would be the stocks of gold, silver or platinum mining companies, which can provide commodities exposure via stocks, he's also less enthusiastic about these, but he does cite the Vanguard precious metals and mining fund although he criticizes it because it has since broadened its charter to invest in base metals as well [in my opinion right now this is absolutely not a bad thing]. He also cites how these stocks are "the asset class du jour" [again this book came out in 2010] and he says that the real return of gold over time is zero, plus it yields no dividend, and incurs storage costs, thus he's not a fan of owning physical gold itself. Finally a quick comment on international REITs, but citing this would be a small percentage allocation and probably not worth it. Also note the comment in the chapter summary on the trade-off of time and effort with simplicity or complexity of your various asset class choices.
Chapter 4: The Enemy in the Mirror
95ff Discussion of behavioral finance; on the difference between a trained professional who has the reflective ability to understand human reactions, but also does what his training tells him is the proper thing to do; the author uses a metaphor here of a pilot trainee dealing with a situation where his instinct is to pull on the yoke too hard, which stalls the plane, whereas the instructor takes over because he has sufficient training to know that the plane can't get enough air speed to produce lift: the instructor, thanks to years of training, instinctively knows to act counter to the normal newbie reflex. The author's paradigm here is discerning between acting by reflection and acting by reflex. "Nothing is more likely to make you poor than your own emotions."
97ff Now the author--himself a neurologist--goes into explaining some of the anatomy of the human brain: discussion of the limbic system; the two nuclei accumbens, which we could call the brain's "anticipation center" like for eating, financial reward and greed. Note the comment in the footnote on page 98: "Although the singular term nucleus accumbens is more commonly used, from now on I employ the plural form to avoid confusion; the image I wish to evoke is a pair of greedy glowing coals, one behind each eye." Also on the nuclei accumbens' response and adaptation to patterns of rewards and stimuli. And on the amygdala and its role as a fear center and its proximity to the hippocampus which encodes our memories.
100ff Long multipage discussion here of a type of paradox [although the author doesn't quote frame it this way] between humans being social animals and depending on social interaction, yet in investing this quality of human nature is very dangerous: it causes us to join the herd ("we cannot help but be affected by the fear and greed of those around us") as well as follow easy-to-understand narratives (the author gives an example of a physician getting wrapped around the axle about some pharmaceutical company's new antibiotic thinking it's going to make the stock go way higher but forgetting that there are likely many other factors affecting that company's stock price). "Learn to automatically mistrust simple narrative explanations of complex economic or financial events."
104ff We crave being entertained ("owning shares of Netflix is much more enjoyable than owning, say, Consolidated Edison or Federal Screw Works"); we are too easily frightened (we overfocus on short-term losses, we have loss aversion, losses feel much more horrible than analogous gains, etc.) Note also comments here about "hedonic breakeven" in terms of the frequency that you check your portfolio: basically you suffer a lot more the more you check your portfolio.
109ff We use too many analogies [behavioral finance calls this representative bias]: various ironies here that indicate our thinking is wrong: we think fast-growing companies or sexy companies will be good stocks (they're typically not), we think fast-growing country economies have great stock market returns (they often don't); note the irony that the United Kingdom, which went from a globally dominant country to a forgettably unimportant one, had the world's highest equity market returns during this exact period of decline. We extrapolate the recent past too far into the future (we are pattern seeking primates who tend to perceive order where none exists--cognitive psychologists call this recency bias [and note that it's usually better to think in terms of mean reversion or reversals in trends]). We all think we're better than average (the author gives the famous example of an MBA class where the professor gives a questionnaire to students to rank their relative driving ability and half the class rates itself in the top quartile and almost nobody ever rated themselves below average). "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."
113ff A great example here of one of the most appalling examples of epistemic arrogance in the history of investing with Robert Citron, who single-handedly bankrupted Orange County, California in 1993 with a bunch of derivative bets on interest rates. He was asked what would happen if interest rates rose and he replied they would not saying "I am one of the largest investors in America. I know these things." [Whenever you hear someone say something as astoundingly arrogant as this, run.]
114ff More pitfalls of being human: we are competitive with our peer investors, keeping up with the Joneses with sexy or status-based investments. Comments on hedge funds as an example of "status investments" and further comments on the high failure rate of hedge funds: of 600 hedge registered in 1996, just one quarter of those still operated 8 years later in 2004. [I would add here one of the most important qualities you can develop--both to make yourself a better investor but also to make yourself a happier human--is to make it so that you are happy for others' successes; also it's good to train yourself to "lie down" and present yourself as just a little bit below (in income, in status, whatever) the person you're talking to; finally on the idea of "sending the elevator back down": sharing your insights and helping other people make it along with you. These ideas are all from BowTiedBull, and they are collectively a great cure for a lot of the pitfalls discussed in this chapter.]
116 the author gives some advice here on how to deal with these various biases and psychological traps that we are prey to:
* Beware of glib narrative explanations
* Dare to be dull ("if done properly, successful investing entertains as much as watching clothes tumble in the dryer window. Always remember that the more exciting a given stock or asset class is, the more likely it is to be over-owned, over-priced, and destined for low future returns.")
* Get into financial shape (here he's referring to getting into good psychological shape, note the quote from J.M. Keynes here: "I would say that it is from time to time the duty of the serious investor to accept the depreciation of his holdings with equanimity and without reproaching himself." The author further recommends rebalancing as a training tool to force you to sell high and buy low, especially after really bad years. "This will feel terrible; most grizzled veterans will tell you that the best purchases are often made when they feel they are about to throw up." [Holy cow is this ever true!]
* Stop making analogies (just another example here of daring to be dull)
* Relish the randomness (the author describes how when he hears a market guru making some prediction he imagines monkeys throwing darts at a stock page; also he recommends keeping a log of your investment hunches over time and then reviewing your predictions: "the odds are overwhelming you will be glad you did not act on most of them.")
* You do not live in Lake Wobegon (in Lake Wobegon everyone is above average, but you want to realize that you're up against extremely well-equipped, workaholic opponents when you go up against Wall Street. There's a much easier way to win: use index funds and avoid paying fees to these people who are killing each other to try to outperform! Also note the comments here of the difference between believing you are risk tolerant and actually being risk tolerant, these are "two entirely different things.")
* Mingle with the masses (the author's idea here is never be a whale because they're "the cash cows of the financial services companies" who get sold high-fee investment pools, hedge funds and opaque, exotic products).
Chapter 5: Muggers and Worse
127ff The author gives a talk on the relationship between economic history and market returns and he gets a lecture from some Wall Street advisor saying "You don't understand alternatives" [meaning hedge funds, commodities funds, structured products, CDOs etc.]. The author describes that in the few years after this talk a bunch of those products blew up, while charging high fees along the way, earning the brokerage firms lots of money. He calls Wall Street "the world's largest bad neighborhood," citing the absolute lack of educational requirements for brokers; the author writes that their level of financial knowledge "never ceases to appall me." Discussion here of agency conflicts where nobody goes to Wall Street to make clients wealthy; people and firms are there to maximize their bottom line, not yours.
130 Hilarious quote here of a young broker asking an old one about the secret to his success. "It's simple; over the years I've slowly transferred my clients' assets to my own name." The author points out also that stockbrokers are trained in sales, investments here are just another vehicle for selling.
132 Comments here on bonds--and municipal bonds specifically--sold out of a brokerage firm's own inventory, where the broker is a principal, and the client is told "there was no commission" as if it were some kind of Christmas gift, when in reality the bond was marked up considerably from the price that the broker actually paid; firms can get away with this in markets where there aren't daily active quotes like in municipal bond markets, thus nobody really knows what the underlying price is. [A lot of this section here could be replaced with the simple phrase "don't be retail."]
132ff Comments here about Wall Street research: the author talks about how it's given first to institutional clients and then later to retail, they get "sloppy seconds"; [note that anyone who's worked on the institutional side knows that the recommendations aren't really the value of sellside research, it's more context on the industry, historical information about industry cycles--in fact many of the exact same things the author tells us to learn, basically market history! You can learn in an hour or two with a sell-side chemicals analyst much more about the chemical cycle and history of that industry then you'd ever be able to do on your own over years of investing experience.
133 Note the comments also about IPO access here: [if you are ever offered access to an IPO as a retail investor, run: it means that much smarter institutions already said no! Think of this as way worse than sloppy seconds, more like sloppy 15ths]. Comments also here on the infamous scandals of Mary Meeker and Henry Blodgett during the late '90s tech and dot-com boom.
135ff Now on the mutual fund industry: first for some minor advantages, like you get instant diversification, transparency of expenses, professional management and protection under the Investment Company Act of 1940; it's also easy for you to execute trades which give you instant asset coverage. But then on the liabilities of this industry: they are compensated by growing assets under management not by returns [obviously a firm that puts up good numbers will get more assets, but the idea here is these funds are also marketing companies]; also notice the "incubator fund" process by which a fund company creates a large number of fledgling funds and then markets the heck out of the ones that happen to perform the best.
139 Note the authors dictum here "Do not invest with any mutual fund family that is owned by a publicly traded parent company." The idea here is to be aware of the agency problem where the publicly traded company is motivated by quarterly earnings and making numbers, they are not necessarily interested in your investment performance. [This is a bit simplistic but it is still a risk to consider. Also note that these types of companies--in the past--have been great investments, in part because they're asset-light, they have great scale, they are typically very profitable, with great dividends and consistent dividend growth. Now, however, there's a secular trend of fee compression in this industry so it's hard to say if this is still true as an investment thesis.]
142 "You are engaged in a life-and-death struggle with a financial services industry. Every dollar in fees, expenses, and spreads you pay them comes directly out of your pocket."
Chapter 6: Building Your Portfolio
143ff Explaining the math behind why you should save more and earlier in your life; the author reminds the reader to remember Pascal's wager: this is the author's metaphor here for the catastrophic risk of undersaving early, which means you might not have enough when you're old. Also comments on the idea of putting some of your capital into an immediate fixed annuity when you retire [note that in a high inflation environment this would be a disaster, as inflation dissolved away the purchasing power of your fixed monthly annuity payment. And of course when you die the insurance company gets the underlying capital you put in, none of it goes to your heirs.]
144ff Review here of a proper withdrawal rate: the author argues 2% is the best number to use; at 3% you're "probably safe"; at 4% you're taking real risks and 5% is a big problem; he does cite that a fixed annuity could yield 6-8%. Interesting point here the author makes about the best type of annuity deal you can find anywhere: it comes from deferring social security until as late as possible. [Good insight!]
146 Long section here on different investment products the author recommends: almost all of them are Vanguard funds although there are also some iShares: all are low fee and [amazingly] most of the fees are even lower now than they were when this book came out! See for example the Vanguard 500 fund, which used to cost 18 basis points, and now costs 4bp. And now of course you can buy the Vanguard 500 ETP [VOO] for just 3pb. It's also worth noting his criticisms of ETFs, citing commissions and buy/sell spreads: this is less of an issue in the modern era of commission-free discount brokers and decimalized stock prices. The author also criticizes ETFs because they give you the ability to trade intraday: this is probably a reasonable criticism for most investors because it gives your monkey mind that many more chances to get panicked out of your capital.
152ff Advice on how to save: here the author walks through the mechanics of dollar cost averaging, basically how it has you buy more "units" of an investment or a fund as the price goes lower because you're investing the same dollar each period. Note the comments here on "value averaging," another technique for deploying retirement savings: the author calls it "the most powerful tool I know." You start with the fixed amount you save every month, but what you do is "top off" the savings to make sure you meet your target for each fund (or account). Thus this causes you to buy even more shares at lower prices if there's a sell-off. The author recommends Michael Edleson's book Value Averaging.
154ff Then four examples of four different archetypal investors:
1) "Young Yvonne" who is just starting out, with no assets, bombarded with materialist/consumerist culture; she runs her expenses low in order to set up a 6-month emergency fund, she funds her 401k fund with a 50/50 stock/bond mix. The author gives a sample portfolio here of 25% Vanguard Total Stock Market Index, 25% Vanguard Total International Index and 50% Vanguard Short-Term Bond Index, and has her dollar cost average.
157ff 2) "Sheltered Sam" who has all of his assets in retirement accounts. This client "archetype" is sort of unhelpful, but I think the author's point is to show the benefits of having assets in an IRA, while pointing out what will happen when you have to take out RMDs when you're 70 1/2. [Note that the rules have changed on at what age RMDs are required: it's now 73 and set to increase to 75 by 2033 by recent changes in the law. I'm sure this stuff with change again by then as well!]. [One other thought: I'd say this client archetype also indirectly illustrates the need to have all-purpose money saved elsewhere in a taxable account as well, you don't want to depend only on an IRA because it's fairly costly to get at that money.]
159ff 3) "Taxable Ted" who has all his assets in taxable accounts: the author has one suggestion here to invest in a variable annuity from Vanguard (which offers a relatively low-cost one), the author also suggests municipal bond funds. Also note the comments here about dealing with a large lump sum cash balance and how to invest it: do you dollar cost average invest it over time or put it all in all at once (and thus get exposure right away to the market but also to possible downside market movement)? The author offers a possible compromise: invest half the capital right away and then value- or dollar cost average the rest over some time period.
162ff 4) Finally, "In-Between Ida" who's got her assets divided between retirement and taxable accounts: she's 70, recently widowed, and has a million dollar portfolio, half in an IRA and half in taxable accounts. Useful discussion here working out some of the questions that come up regarding deferring Social Security: like how long do you have to live in order to make it pay off to do so? [You can look at it as a sort of bet on how long you think you'll live. Obviously if you defer Social Security and die before you start getting the payments, you don't get any money at all...] The author reminds the reader of Pascal's wager: the idea is to avoid being poor when you're old, thus if you can defer it you probably should.
164 There are actually some factually incorrect comments here from the author on insurance companies with regard to annuities and life insurance. The author recommends avoiding buying an annuity policy because of what we learned about the risk of insurance companies during the great financial crisis, as he comments that "the long-term survival of most of the insurance companies offering these products might be at risk." My understanding is that each of these national insurance companies are required to have a separate state-based and state-regulated annuity and life insurance business that has capital requirements set by each state in which the company offers these products--and these state businesses are hived off from the parent corporation. For example even when AIG collapsed the state-regulated life and insurance and annuity divisions were fully capitalized, segregated and remained solvent. I think the real risk to worry about with an annuity is the fact that any fixed payment is going to get eaten alive by inflation over time.
165 More comments on how to think about Social Security payments: the author describes them as "super TIPs" as they will rise with inflation. [But make sure to note here that the system is unlikely to increase Social Security with true inflation, instead they will benchmark it to an artificially surpressed CPI rate, they need to inflate away these payments to some extent too in order for the overall system to survive.] Also another thing to think about is to look at the value of Social Security payments in capitalized terms, thus you can think of it as a pseudo-bond allocation: so if you have a $30,000 social security benefit you could think of it as like a $400,000 bond paying you 7% roughly. [A nuance to keep in mind here is that it's also not really like a bond allocation because you can't sell part of it to rebalance into stocks if there's a market crash. It's not fungible in that way!]
166 Comments here on rebalancing and dealing with taxes. The author suggests not selling stocks to rebalance the taxable portfolio but rather to use fund distributions, dividends or interest that the stock funds throw off to rebalance. Comments here on a 50/50 stock/bond portfolio that after a prolonged bull market takes you to say 65/35: you want to do something just from a risk control point of view even if it means paying some capital gains taxes. The author argues if you ever get more than 10% over policy you should do some rebalancing. [This is beyond the scope of this book, but there are net worth levels in which you wouldn't bother to do this: if you are at a point where you already have all the bonds and cash you need to fund all your expenses forever, you can let your stock portion of your portfolio ride.] More comments on rebalancing: if you have your assets across taxable and tax deferred accounts you can do the bulk of the rebalancing inside the sheltered account and just make sure that the balance is at your target across all your accounts. [One other thing the author doesn't address here is people who are still saving money can use incremental savings as a rebalancing driver, if your stock portion gets too large then you tilt your incremental savings over the next six months towards bonds (or vice versa). Thus you don't need to sell anything at all, you make the adjustments with the new capital you add via savings.]
166ff On how frequently you should rebalance: the author says "relatively infrequently," once every few years; more than once per year is probably too often, certainly in a taxable portfolio. [Interesting.] Part of the justification here is that over a period of a year or less, stock prices tend to "trend," whereas over a period of more than a year prices tend to mean revert, thus an optimal strategy would be something like letting losses and gains run for 2 to 3 years and then rebalance, this is why an effective rebalancing interval would be every few years. Also comments on the "industrial-grade discipline" that is required to do this, particularly when making purchases in the face of an economic catastrophe. [I look at this a little bit differently: the way I see it is when there's a sell-off in stocks I start to nibble at things and when the sell-off gets worse I nibble some more (or on the other side, as things go up, I trim, as they go higher I trim a little more) and so on, and this is how I effectively rebalance. I let the market give it to me and then I respond to it.]
169 Another nuance here that if an index fund does terribly it's because that asset class has done terribly; but if a managed mutual fund does terribly, it might be because it's the manager's skill went away, he's having a bad luck streak, or he's not competent; what can happen here is you end up selling that fund or fire that manager just as his or her performance is about to turn.
169ff Note the technical section here on why rebalancing with high-volatility assets such as precious metals stocks tends to drive higher rates of return when rebalanced back to your target level: the reasoning here stems from asset classes with high volatility that also do not have high correlation to stocks. Also comments on rebalancing at a certain threshold (say 3 percentage points above or below your target), or seeing a more relative/proportionate limit (like for example 20% above or below the target allocation).
173 Comments here on raising children with an investing mindset: the author suggests teaching your children to invest by setting up a small portfolio with two or three index funds in each child's name at around age 10; teaching them to log in, print out their statements, go over their portfolio performance each quarter etc.
174ff Finally some closing summary comments about asking yourself how much complexity can I handle, and then what are my personal asset class preferences, and then how much tracking error can I tolerate [by this he means comparing your investment results to the people around you, in other words does it stress you out a lot to be putting up way different numbers than your friends or peers?]
176 More useful comments here to think about your work situation--"your human capital": first, think about the company you work for: is it sensitive to the health of the nation's economy? If so, then you may not want to invest in economically sensitive stocks. [Another example: when I worked for a technology investment fund, I tilted most of my savings toward investments like CDs, bonds and conservative non-tech stocks, so I wouldn't both lose my job and have my personal portfolio blow up at the same time.] Likewise, you can think of a pension payment or social security payment as a type of bond for purposes of your asset allocation percentages.
177 "When you minimize your expenses and diversify, you forego bragging rights with the neighbors and inlaws, but you will also minimize the chances of impoverishing yourself and the ones you love."
Chapter 7: The Name of the Game
179ff "If you bypass this book's advice and make all of the classic investment mistakes--ignoring expenses, chasing hot asset classes and managers, underestimating your risk tolerance, and being overly swayed by your family, friends, neighbors, and the news--you will almost certainly join the millions of Americans doomed to a quiet life of retirement desperation. On the other hand, if you take the advice between these covers and keep expenses to a minimum with a prudent mix of index funds and keep your head while everyone else is losing theirs, then you will at least have a fighting chance."
180ff Here the author shares his manifesto in several bullet points:
* Understand the tradeoff between risk and return.
* Have command of the history of financial markets so that you can say "I've been here before" when the market goes crazy.
* Know the Gordon equation to think about estimating future returns of stocks versus bonds by looking at the dividend yield of stocks versus the interest rate on bonds.
* Keep in mind that markets are brutally efficient at the level of individual securities; you are trading against someone who's smarter and better-informed than you are, and worst case against a corporate executive who knows far more about his company than you ever will.
* Your primary decision is the overall percentages of stocks versus bonds.
* Diversification, because we don't know what markets will do.
* Do not pay too much attention to your portfolio's best and worse performing asset classes, the portfolio's the thing.
* You are your own worst investment enemy: don't think that you can pick stocks or time the market.
* Investors are too susceptible to the emotional impact of financial news and to the fear and greed of their neighbors. Tune this stuff out. Also, if you find yourself owning the same investments as your friends you're probably doing something wrong.
* Humans are pattern-seeking primates: avoid imagining patterns.
* Keep in mind the fees, commissions and agendas of stockbrokers
* Keep in mind that mutual funds charge fees, their purpose is to gather assets, and especially avoid funds owned by publicly-traded parents.
* Live as modestly as you can and save as much as you can for as long as you can.
* Design your stock/bond allocation with your age and risk tolerance firmly in mind.
* Consider tilting towards small and value stocks.
* If you need to spend more than 4% of your nest egg in retirement per year, consider an immediate fixed annuity, also the best annuity purchase you can make is delaying social security until age 70.
* Teach your children well: the most important thing you can do for them is to teach them to save, invest and spend prudently.
* Finally never forget Pascal's wager as it applies to investing: you want to avoid dying poor.
The Books You Need... Aged Like Fine Wine
185ff The author offers a list of books for continuing your investment education grouped by topic: theory, history, psychology, and business:
Theory: Burton G. Malkiel: A Random Walk Down Wall Street
History: Edward Chancellor: Devil Take the Hindmost: A History of Financial Speculation ("the classic narrative on bubbles and panics")
Psychology: Jason Zweig: Your Money and Your Brain ("a delicious romp through the thicket of human nature and the havoc it wreaks on our finances")
Business: Jack Bogle: Common Sense on Mutual Funds
186 Finally, the author recommends Jonathan Clements' The Little Book of Main Street Money, and if you're mathematically inclined, Michael Edlesten's Value Averaging: The Safe and Easy Strategy for Higher Investment Returns.
To Read:
Sidney Homer and Richard Sylla: A History of Interest Rates
Elroy Dimson, et al: Triumph of the Optimists: 101 Years of Global Investment Returns
William Schultheis: The Coffeehouse Investor: How to Build Wealth, Ignore Wall Street, and Get on with Your Life
Fred Schwed: Where Are the Customers' Yachts?
Fred Schwed: Where Are the Customers' Yachts?
Jason Zweig: Your Money and Your Brain
***Michael Edleson: Value Averaging
William J. Bernstein: The Birth of Plenty
William J. Bernstein: The Birth of Plenty
William J. Bernstein: A Splendid Exchange
William J. Bernstein: The Intelligent Asset Allocator
William J. Bernstein: The Four Pillars of Investing
Warren Buffett: "The Superinvestors of Graham-and-Doddsville" [essay]