In my last post, I introduced "The Investor's Manifesto" and William J. Bernstein. In this post, I'll give you my notes from the Preface.
Bernstein starts off optimistic as hell:
Finance is a relatively circumscribed field; not that much is really known for certain. The body of knowledge that the individual investor, or even the professional, needs to master is pitifully small.
Whew. What a relief, right? But then he lists the four characteristics of successful investors, and laments that very few people (a trivial percent of the population) will have all four.
Successful investors need four abilities. First, they must possess an interest in the process. It is no different from carpentry, gardening, or parenting. If money management is not enjoyable, then a lousy job inevitably results, and, unfortunately, most people enjoy finance about as much as they do root canal work.
Second, investors need more than a bit of math horsepower, far beyond simple arithmetic and algebra, or even the ability to manipulate a spreadsheet. 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.
Third, investors need a firm grasp of financial history, from the South Sea Bubble to the Great Depression. Alas, as we shall soon see, this is something that even professionals have real trouble with.
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.
In this series on Financial Competence and Asset Allocation, we'll study all four of these abilities as Bernstein recommends.
Bernstein is clearly conflicted. He loves finance, and wants everyone to be able to master it -- but due to people's reactions to the difficulty of his previous books, he's very pessimistic. He says that expecting the average person to manage their own investments, "makes about as much sense as expecting the average person to be his or her own airline pilot or family surgeon."
That may be true. But readers of this blog who are willing to work towards financial competence are not the average person.
Bernstein closes with this thought:
I emphasize three main principles: first, to not be too greedy; second, to diversify as widely as possible; and third, to always be wary of the investment industry. People do not seek employment in investment banks, brokerage houses, and mutual fund companies with the same motivations as those who choose to work in fire departments or elementary schools. 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.”
It's a promising start to the book. We'll continue with Chapter 1 shortly.