It’s no secret that I’m a big William Bernstein fan, and will read anything he writes as soon as it’s available. So imagine my delight when he was kind enough to share a manuscript of his new book, The Investor’s Manifesto, which was just released.
The book has a subtitle “Preparing for Prosperity, Armageddon, and Everything In Between.” This is actually one of the main points of the book, and one that I’ve been hammering for a long time. As human beings, we have an inherent fear of the unknown. Our want and actual need to know what to expect is probably some emotional relic we inherited from our ancient ancestors. How we feel about our investing is no different. Investors want, and even have an emotional need, to know the future. So they seek and follow the profit-prophets who are more than willing to exploit this human instinct for their own gain. They have no compunctions against hitching their philosophies to the mood of the moment, and writing one day about the Dow 40,000, and the next day writing about the Dow 3,800.
Yet deep down, we all know there is no getting around the uncertainty of the future. But I can tell you with complete certainty that the best way to go broke is to invest as if you are sure you know what next year holds in store. A much better strategy is to invest as Bernstein advises in this book which recognizes an uncertain future and prepares for it.
The book begins with a brief history of capital markets and states that the next few decades of the stock market may be very different than the last 200 years. After all, 200 years is just a speck of time in the total history of capital markets.
High returns without risk and market expectations
If you want to know how to get high returns without risk, this book isn’t for you. Yes, risk and return are inextricably intertwined. Thus, market plunges like we saw in 2008 are the price of admission to get higher returns. Bernstein uses the Gordon equation to estimate annual long-term real (inflation adjusted) returns of asset classes. He estimates a range of minus three percent for T-Bills to five percent or more for large-cap foreign stocks, REITS, and small cap and value stocks. This estimate was developed in early 2009, before the recent raging bull, so current estimates might be lower now.
Protection from our enemies
Who’s our biggest enemy when it comes to investing? It’s not the stock broker or even Wall Street. Bernstein notes it’s the enemy in the mirror - ourselves. And in the forewarned is forearmed department, the book gives some great advice on how to protect our nest-egg from ourselves as well as from Wall Street. He covers the one technique of going against the crowd that actually works - rebalancing. It’s simple but not very easy to overcome our emotions.
A close second on the enemies list is the financial services industry that I’m a part of. Bernstein compares us to “muggers or worse.” His advice is “if you act on the assumption that every insurance salesman, mutual fund salesperson, and financial advisor you encounter is a hardened criminal, you will do just fine.” A defensive investing approach that, sadly, I have to agree with.
Building your portfolio
This book isn’t just about investment philosophy; it’s about getting down to brass tacks. This is a practical book that goes into specific recommendations of funds to own to build portfolios. What asset classes does he recommend? Why, all of them, of course. He notes, “When you minimize your expenses and diversify, you forgo bragging rights with neighbors and in-laws, but you will also minimize the chances of impoverishing yourself and the ones you love.” He rightfully observes that this is “one fair trade.”
Summary
William Bernstein is a brilliant guy so it’s no surprise that this book is brilliantly written. It provides the one “guarantee” I actually believe, and that is that following his advice will not make the reader fabulously wealthy. What following his advice will do, is maximize consumers’ chances of living comfortably in retirement and minimize chances of living their final years in poverty.
I’ll be recommending The Investor’s Manifesto to my clients and friends. In my opinion, no investor should be without it!
