Book Review – The Four Pillars of Investing

Several months ago, I set out to read the book A Random Walk Down Wall Street.  It was a great book, if a little bit lengthy.  Upon reading my review of it, a business school associate suggested that I pick-up the book The Four Pillars of Investing by William Bernstein.

Well, I finally worked my way through a couple other books that were at the top of my list and got a chance to dive into this one.  Let’s see how this general investing book stacks up against the others I’ve reviewed so far 🙂

 

 

 Contents and the Basic Premise of “The Four Pillars of Investing”

The basic premise of  The Four Pillars of Investing is that an investor needs to be competent in several areas of investing to really have good long term investing results.  Bernstein breaks these areas down into what he calls “pillars.”  These four pillars of investing are:

1. Theory – This section covers the idea that investors get compensated for the amount of risk they are willing to take.  The more risk an investor takes on, the higher return that should be expected.  This section also discusses that almost all short-term results that are better than the market can be explained purely by luck.  Over time, the results will revert back to the mean.  Some discussion is also placed on the need to properly diversify to minimize one’s risk when investing for the long term.
2. History – This section covers previous bubbles and busts starting with the south sea bubble in the 1700’s all the way through the dot-com crash.
3. Psychology – Section three covers common pitfalls that affect most investors/traders if they are not careful.  From trading too often, not properly diversifying, and overpaying for assets, there are many ways that investors can get wrapped up in what they are doing without stepping back to assess the bigger picture.
4. Business – This section goes into details on how the whole Wall Street system is constructed first and foremost to skim money from unwitting public investors.  This section also gives you a great appreciation for how little many “brokers” actually know about the inner workings of investing and the stock market.  Upon finishing  The Four Pillars of Investing, Bernstein asserts you will know more than 95% of all brokers out there.

 

What I Didn’t Like About “The Four Pillars of Investing”

Overall, I really enjoyed The Four Pillars of Investing.  I do have a couple criticisms of the book, but they are small in nature.

• The book really was pretty long (300+) pages and went into quite a bit of detail.  It seems that it could have been shortened up a bit and still covered the main points.
• The book did get a little complicated at certain points.  The author did his best to prep the reader for this, but a couple of points may be over the heads of some readers.
• The book is a little outdated as it does not contain discussions from the recent market crash: 2008-2009.  It’s hard to fault the book for this, but I really would have liked to see Bernstein’s analysis of the most recent crash.

As you can see, these are pretty nit-picky.
 

What I Loved About “The Four Pillars of Investing”

As I mentioned, I thoroughly enjoyed  The Four Pillars of Investing.  Even though it was long and detailed, I found that I really picked up some great knowledge from it.  Some of the finer points for me were:

• Pillar #2!  I really enjoyed reading about historical booms and busts and how the public gets drawn into new investing “schemes”.
• Even though I’m well aware of how Wall Street is setup to “fee you to death,” I thought Bernstein’s discussion of this topic was spot on.  Anyone that reads this book cannot help but to look at the investing community in a whole new light.
• Bernstein’s discussion of timing the market, investing newsletters, and hot fund managers was also a great addition.  I like how he boiled it down to: “if someone had the winning formula to make gobs of money, do you think they would share this with you?”  Of course they wouldn’t!!!  So why allow yourself to get caught up in the fantasy?

Rating for “The Four Pillars of Investing”

4/5 Stars – A little long and a slightly beyond a beginner’s book, but a great read to set you straight on how to become a great investor for the long-term.

Who Should Read “The Four Pillars of Investing”

The Four Pillars of Investing is really a good book that everyone should read before they begin investing.  A couple parts do get a little bogged down in details, but that is pretty easy to forgive when there are so many solid words of investing advice to be found.  If you have not read a serious book on investing, then you owe it to yourself to give this book a go.  It will really change your entire investment perspective and put you on a path to investing success!