New book harpoons investing industry
Jonathan Chevreau The National Post Saturday November 2, 2002
Author tough on brokers, financial press, mutual funds

Wouldn't it be nice to read just one investment book, set your long-term course and ignore the noise of other get-rich-quick books, the financial press, money TV shows and the Internet?

After a decade at this job and writing or co-authoring eight books of my own, it's a rare financial book which grabs my attention these days. Most of what's out there in the Canadian market are self-serving loss leaders for people who make their real money in the financial services industry.

Carny barkers, William Bernstein would call them. Dr. Bernstein (he's both an MD and a PhD) is in the financial services industry too, but only belatedly, after a successful career as an American doctor who learned the hard way what mistakes affluent investors make.

High-income professionals are the people most abused by the financial services industry, he maintains. What's worse, "the wealthier the client, the more likely he is to be badly abused." The industry cynically calls well-heeled investors "whales" and once the harpoons find their targets, do all they can to extract maximum commissions from them.

Dr. Bernstein is one whale who fought back. He has distilled his knowledge for the benefit of other whales and would-be whales in two hard-hitting investment books. They are The Intelligent Asset Allocator (McGraw Hill, New York, 2001) and The Four Pillars of Investing: Lessons for Building a Winning Portfolio (McGraw Hill, 2002).

Dr. Bernstein is immensely critical of stock brokers. He's pretty dubious about the mutual fund industry, too. "Make no mistake about it," he writes in Four Pillars, "You are engaged in a brutal zero-sum contest with them -- every penny of commissions, fees, and transactional costs they extract is irretrievably lost to you."

Nor does he view the financial press as the antidote. Sadly for yours truly, he dismisses 99% of financial journalism, which he says engages in a conflicted symbiosis with the same financial services industry. Those glowing reviews of hot fund managers are little more than "financial pornography," he says.

"The bread and butter of the finance writer is the 'successful' fund manager, market strategist, or newsletter writer." While they may appear to be successful, the subjects of these gushing media profiles are mostly "lucky, not skilled," he writes, "You might as well be reading about lottery winners."

In what, then, does he believe? Portfolio construction, asset allocation and indexing. Perhaps that's why indexing guru John Bogle provides a front-cover endorsement for Four Pillars as the best investment book of the year.

The accolade is merited. No matter how knowledgeable you think you are about investing, you can benefit from this book. More to the point, I'll wager that you know at least five friends and relatives who could benefit from it even more. Buy the book and as you read, use a yellow highlighter to mark passages you think a friend needs to understand. Then give it to them, wrapped in this column. If they take the lessons to heart, your gift will likely be worth thousands of dollars over a lifetime.

So, what are the four pillars?

They are the theory, history, psychology and business of investing. Part 1 underlines the fact that reward inevitably accompanies risk and that "the market is smarter than you are." Therefore, Bernstein eschews individual stock picking or the notion you can succeed in choosing actively managed mutual funds which will overcome the drag of their own fees enough to beat the market.

Part 2 reviews investing history, including prior manias and the inevitable bearish aftermaths. Written after 9/11, he offers some insightful analysis of the late 1990s bubble and current bear market. He includes a chapter on the "agony and the opportunity" of market bottoms.

Part 3 looks at common investor misbehaviour and "behavioural therapy." Here we learn "the conventional wisdom is usually wrong" and that investors who don't want to get trampled must "avoid the thundering herd."

Part 4 savages first brokers ("Your broker is not your buddy"), then mutual funds ("Neither is your mutual fund"; and finally the media and financial press. He praises only four [American] financial writers at the top of their profession: Jane Bryant Quinn, syndicated columnist; Scott Burns of Dallas Morning News; Jason Zweig of Money magazine and Jonathan Clements of The Wall Street Journal.

A fifth and concluding section covers investment strategy and how to assemble the four pillars, looks at how much money is needed to retire -- "a lot" -- and how to create the right mix of asset classes for your personal situation.

You can find the introduction and Chapter 1 and order through Dr. Bernstein's quarterly, Efficient Frontier, is also useful, more particularly for sophisticated investors.


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