William J. Bernstein doesn’t mince words in his book The Investor’s Manifesto: Preparing for Prosperity, Armageddon, and everything in Between. The style is very direct which makes it easy to read and understand. Bernstein has strong opinions about investing and he makes sense.
The main focus of the book is how to save and invest in preparation for retirement. Bernstein has tough love for the majority of individual investors who make serious mistakes that cost money, and has harsh words for the financial industry that takes advantage of people. The main advice is to find the right balance of low-cost index funds, and he gives a number of example portfolios. He also has some detailed advice on how to teach children to manage money well.
Here are a few parts of the book that caught my eye:
“I have come to the sad conclusion that only a tiny minority [of investors] will ever succeed in managing their money even tolerably well.” I would add that this is true even with the help of a typical financial advisor. Bernstein believes that the two biggest problems are overconfidence and overemphasis on recent history.
The Investment Industry
“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. ... If rigorous precautions are not taken, the financial services industry will strip investors of their wealth faster than they can say ‘Bernie Madoff.’”
“If you act on the assumption that every broker, insurance salesman, mutual fund salesperson, and financial advisor you encounter is a hardened criminal, you will do just fine.”
Bernstein claims that the best estimator for real returns in the stock market is the Gordon equation which just adds the dividend rate to the real rate of increase of dividends. This certainly makes sense because it is essentially measuring business performance.
Renting vs. Buying a House
Bernstein’s rule of thumb is that if a house costs more than 150 times what it would cost to rent it monthly, you’re better off renting. “I have found that this is one of the fastest ways known to man of darkening a realtor’s face.”
A table of costs of actively-managed mutual funds including expense ratio, commissions, bid/ask spread, and impact costs, gives totals of 2.2% for large cap funds, 4.1% for small cap funds, and 9.0% for emerging markets. Among “active mutual fund managers ... few can surmount these hurdles in the long run.”
Bernstein believes that commodities are just the “asset class du jour” and that future returns will be “certainly much lower than they have been in the past.”
“Nothing is more likely to make you poor than your emotions; nothing is more likely to save your finances than learning how to use cool, dispassionate reason to hold these emotions in check.”
Rebalancing in really bad years “will mean pouring large amounts into falling equities, when your friends and family are running around like decapitated poultry.”
Bernstein recommends periodic rebalancing and doesn’t like threshold rebalancing. His main reason seems to be that it can lead to frequent trading when markets are volatile. This doesn’t make sense to me. If the thresholds are wide enough, then when high volatility leads to trading, you are making lots of money selling high and buying low. Trading costs are easy to take when the trades are profitable, which they must be when using threshold rebalancing with sufficiently wide thresholds.
Mutual Fund Companies
“Do not invest with any mutual fund family that is owned by a publicly traded parent company.” Bernstein says that the profit imperative of publicly traded companies will drive them to fleece investors.
Spending Rate in Retirement
Bernstein’s advice on what percentage of your starting portfolio (adjusted for inflation) you can spend each year is more conservative than most:
2%: secure as possible
3%: probably safe
4%: taking risks
5%: you had better like cat food
Of course, these percentages depend on how you invest. The percentages are much different for a low-cost investor compared to another investor who pays 2.5% MERs.
Bernstein is clearly very smart and his analysis and advice is usually spot on. Any investor who chooses to stray from Bernstein’s advice should think carefully about exactly why his advice doesn’t apply. I definitely recommend this book to investors.