Nov 06
Investor’s Manifesto
William Bernstein’s latest book, “The Investor’s Manifesto: Preparing for Prosperity, Armageddon, and Everything In Between” is another best-seller for the intelligent investor. Early in the book, Bernstein lays out four reasons why only a tiny minority of investors will ever success in managing their money even tolerably well.
1. They must have an interest in the process of investing. I would hazard a guess that this cuts out well over half the population if not more. As Bernstein puts it, “…most people enjoy finance about as much as they do root canal work.“
2. Investors need some knowledge of math, and this means more than arithmetic and algebra. “Mastering the basics of investment theory requires an understanding of the laws of probability and a working knowledge of statistics. Sadly, as one financial columnist explained to me more than a decade ago, fractions are a stretch for 90 percent of the population.“ We are now down to a very small percentage of the population.
I’m in total agreement with Bernstein on reason number 2. We use a lot of statistics when we are constructing a portfolio. Correlations, projected returns, risk management, portfolio diversification, etc. all require some understanding of statistics.
3. Investors need a firm grasp of financial history and this includes all the market messes going back to the tulip craze, the Great Depression, the 1960s go-go years to the bust of the 1970s, hyper-inflation, greed of the 1990s, and the incompetence of a recent administration.
4. Discipline. Let me quote Dr. Bernstein at length. “Even if investors possess all three of these abilities, it will all be for naught if they do not have a fourth one: the emotional discipline to execute their planned strategy faithfully, come hell, high water, or the apparent end of capitalism as we know it. “Stay the course”: It sounds so easy when uttered at high tide. Unfortunately, when the water recedes, it is not.“
Investor’s Manifesto is a keeper and I expect I will be quoting from this book over the foreseeable future. My ‘Top Ten Investment Books’ will require a revision as this book will crack that list.
Lowell Herr
Photograph: Face painting at The Catlin Gabel Rummage Sale-2009
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