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Saturday, November 14, 2009

Review: The Investor's Manifesto

The Investor's Manifesto is Bill Bernstein's latest book on investing. I was worried that since I had read most of his previous books, The Four Pillars of Investing, and The Birth of Plenty, that this would just be a rehash of old material so brilliantly covered by David Swenson in Unconventional Success.

Bernstein wrote that one of his goals was to write a book even more accessible than Four Pillars, and I think to that end he succeeded --- I easily breezed through the book in a couple of days, and there's no sophisticated math here to scare even the most liberal of liberal arts majors away. A big important section that wasn't properly covered before is the emotional aspects of investing --- Bernstein points out that most investors over-estimate their risk tolerance (something frequently causes them to buy high and sell low), and that faddish investing (investing so as to have something to brag about at dinner parties) is likely to have extremely poor results. He puts it all across in a very witty fashion as well, for instance, writing about the fad for investing in China, he points out that the Chinese stock market has had a negative 3.3 percent return over the last 2 decades, and in addition:
Finally, in many developing markets, governments do not protect shareholders from the rapacity of management as well as in nations with more established legal systems. In other words, in these countries, management and controlling shareholders find it disturbingly easy to loot a company. Even more bluntly, a nation that does not protect its children from lead-contaminated toys will likely not protect its foreign shareholders.

In particular, the chapters on asset allocation and the provided sample asset allocations are now very refined in explanation. His advice on rebalancing, for instance, is even more nuanced than before, and covers all the tax considerations that were not always mentioned in previous books.

He points out on the one hand, given the failure of Wall Street professionals to beat the market or even match the market indices' performance, it seems extremely unlikely that asking all Americans to manage their own 401(k) portfolio would result in a good outcome. On the other hand, hiring a financial advisor is also fraught with danger:
people do not go into the financial services industry for the same reasons that attract individuals to social work, government service, or elementary education. It is rare to meet a hedge fund manager or mutual fund executive who has a vision of the world that extends very far beyond his or her own self-interest. It is not grossly unfair to observe that most seek employment at brokerage houses, hedge funds, and mutual funds for the same reason Willie Sutton supposedly offered for robbing banks: “Because that’s where the money is.” Consequently, you should extend an extra degree of caution to anyone who wants to manage your finances.

These are dilemmas that I myself haven't been able to resolve. Bernstein then finishes up the book by describing how you can inoculate your children against American brand-awareness and marketing, as well as teaching them how to manage their finances well. This isn't typically covered in many financial books, and short as his advice is, I think it will prove effective.

All in all, this is a very good book, and very much worth your time to read. Highly recommended!

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