4 Investment Lessons: Diversify, Diversify, Diversify, And Diversify

4 Investment Lessons: Diversify, Diversify, Diversify, And Diversify by Andrew Stotz, Become A Better Investor

Book: The Four Pillars of Investing: Lessons for Building a Winning Portfolio

Author: William J. Bernstein

Genre: Personal Finance

The Four Pillars of Investing Diversify

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Written by financial expert and neurologist William Bernstein, this book develops ideas he laid out in great detail in his first book The Intelligent Asset Allocator; that equity funds are the sensible way forward for the modern investor. This second book written in 2010, The Four Pillars of Investing offers the tools for investors to build up their wealth without trying to overwhelm the reader with complicated financial speak.

This book ranks 6 out of 22 in my personal rank of investing books. When read this book it provided further support for investing index funds, something that is suitable for nearly every investor. Bernstein highlights that most people like to think that they could pick stocks that are going to outperform. The reality is that even professionals can rarely do that. I found this book appealing because of Bernstein’s deep historical knowledge of markets and the weaving of that into the text. Definitely a book for people who enjoy the topic of investing.

The Four Pillars is for those who don’t want to be baffled with data and statistics. He breaks down investment into ‘Theory’, ‘History’, ‘Psychology’ and ‘Business’: his Pillars of Investing. Some of the examples may be outdated, but for the modern investor his perspective continues make sense for the stock market of today. Indeed, he compares stocks to being like a dog out for a walk on a long leash. It wanders back and forth wherever it likes, but the owner (the stock market) continues steadily in the right direction; a clear image (and pretty accurate description). His style is relaxed, and the book aims for simplicity over complexity; in the short-term stocks and equities go up and down, but in the long-run, they will –doggedly– go up.

Diversify. Diversify. Diversify

Bernstein’s biggest piece of advice is this, “the biggest risk of all is failing to diversify properly.” As he explains, investors can be their own worst enemy buying when stock prices are high and then selling again when they crash. Most investors have no idea what a share is worth. Bernstein suggests that as an individual investor you should just invest in the market, don’t try and pinpoint which companies will do well.

Review The Stock Market’s History

Now, don’t go and bog yourself down with dates and numbers but to gain an understanding of it, take a look at its colorful past. Avoid the “herd mentality” as Bernstein puts it, by learning from the past and not selling on impulse in bad times and buying in good ones, but doing the reverse.

Don’t Fall Victim to Overconfidence

Bernstein is another financial investment writer who advises against investors thinking they will be the ones to outsmart the smart money. Again, he puts forward index funds and asset allocation which he understands as not necessarily thrilling, and yes, gambling is exciting; but betting is entertainment, not investment. In his own words, “you are not capable of beating the stock market. But do not feel bad, because no one else can either.”

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About the Author

Dr. Andrew Stotz, CFA
Dr. Andrew Stotz, CFA is the CEO of A. Stotz Investment Research, a company providing institutional investors with ready-to- invest portfolios in Asia that aim to beat the benchmark through superior stock selection. The company also provides buy- and sell-side clients with financial models to value any company in the world and World Class Benchmarking to determine what companies are financially world class. Previously, as Head of Research at CLSA, Andrew was voted No. 1 Analyst in Thailand in the Asiamoney Brokers Polls for 2008 and 2009. He was also voted No. 1 Analyst in Thailand in the 2009 Institutional Investor magazine All-Asia Research Team Report. Andrew earned his PhD in finance at the University of Science and Technology of China in Anhui province, with a focus on answering questions raised by fund managers and analysts during his career about picking stocks and managing portfolios. In addition, Andrew has been a lecturer in finance for 22 years at various universities in Thailand. Since 2013, he has been the president of the CFA Society of Thailand. He is also the author of How to Start Building Your Wealth Investing in the Stock Market.