Saturday, January 2, 2010

The Investor's Manifesto - William Bernstein - Book Review

The Investor's Manifesto is a short, excellent, and highly readable book by noted financial author William Bernstein. (You may have read Bernstein's The Intelligent Asset Allocator or The Four Pillars of Investing.)

The Manifesto's main points include that selecting individual stocks is folly and that successful investing requires four elements: keen interest in the subject, an understanding of financial history, math skills, and the emotional discipline to minimize the biases - including the sometimes serious self-inflicted wounds - psychologically hard-wired into most investors. For example, desires for narratives frequently oversimplify complex events and create perceived patterns out of randomness. That Bernstein is a neurologist allows him to add insight and good value here.

An additional main point is that nearly all American brokerage firms add little or no net value to their retail clients and cannot be said to have their clients' interests as first priority. Reducing investment costs receives Bernstein's attention directly in a spot-on chapter titled "Muggers and Worse." Comments on investment costs are also sprinkled throughout other chapters: "[o]bserve the private jets and eight-figure bonuses of brokerage executives, paid for by you, and the sub-par returns earned for you by these [executives] ... . If you find yourself sitting, literally or figuratively, in a large, leather-and-mahogany-filled office across from someone who flies private from vacation house to vacation house, pivot 180 degrees and run like hell." The chapter's concluding summary: "[y]ou are engaged in a life-and-death struggle with the financial services industry. ... If you act on the assumption that every broker, insurance salesman ... and financial advisor you encounter is a hardened criminal, you will do just fine."

The book likely will stand the test of time and become an investment classic. We say "likely will" rather than "will" because several references to the capital market events of 2007-2009 may in the future cause the book to appear outdated - a malady common to most books on capital markets. However, 2007-2009 capital markets events are so significant and so skillfully used by Bernstein as examples that the references are justified fully. (On the other hand, (1) the short interval between the rescue of Long-Term Capital Management and the recent federal bailouts for which the rescue was a harbinger, and (2) prospects for federal financial/banking regulatory reform, suggest the possible of a sooner-than-you-might-think, similar crisis. (This is similar to the 100-year flood that occurs every few years.) If and when such a crisis occurs then its events may date the book slightly in its broader, long-term appeal, which is unfortunate since much of the book's content is timeless.

Note that syndicated financial columnist Scott Burns recently published a column about the book; Burns is among those receiving the author's acknowledgments.

Bernstein's concise book has excellent endnotes for readers wanting more details and "jumping off points." Bernstein also does an excellent job "cordoning off" the math - readers who want the math can plow through it; readers who don't aren't interrupted. The book also includes an excellent short chapter on investment books Bernstein recommends, most of which are or will be classics.

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