The Investor’s Manifesto by William Bernstein: Book Notes


  • Many of us are not as brave as we thought. When our investments fall in price, we panic and bail out at the wrong time. Hence most of us should have a more conservative portfolio.
  • When you are leveraged(i.e have borrowed money), if your investments fall in price by x , your real net worth fall by 2x.
  • Homes are best viewed as a consumption item, not an investment.
  • We need to save as much as possible.
  • Fancy investments are more risky than standard index funds.


Successful investors need four abilities:

  1. Interest in the process
  2. Moderate amount of math knowledge: simple arithmetic, algebra, spreadsheets, understanding of the laws of probability and a working knowledge of statistics.
  3. Firm grasp of financial history from the South Sea bubble to the Great Depression
  4. 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.
  • Investors estimated returns are optimistic.
  • Investors think they can beat the market by 2%
  • Investors are pessimistic when the market falls and optimistic when the market rises

Three main principles:

  1. Do not be greedy
  2. Diversify as wide as possible
  3. Be wary of the investment industry

A brief history of financial time

  • Throughout history, there have always been providers and consumers of capital; today it is no different
  • Capital has two forms: bonds(loans) and equity(stock or partnership). Stock has a lower legal standing, is riskier and therefore necessitates a higher long-term return.
  • During crisis, prices of stocks and bonds fall. Usually investing at this stage leads to higher returns. Less often, losses can be permanent and even total. The fact that this has so far not happened in the US does not mean it will never happen.

The nature of the beast

  1. Diversification among different kinds of stock asset classes works well over years and decades, but often quite poorly over weeks and months.
  2. Investors cannot earn high returns without occasionally bearing great loss. If the investor desires safety, he or she is doomed to receive low returns.
  3. Do not trust historical data- especially recent data- to estimate the future returns of stocks and bonds. Instead, rely on interest and dividend payouts and their growth/failure rates.
  4. Expected return= Dividend yield+dividend growth rate.
  5. Expected return bond=coupon yield- annual rate of loss due to default/bankruptcy
  6. Expected real return=Yield+ real growth rate+ annualised change in valuation
  7. Always favour expected returns calculated from the Gordon equation over past returns, no matter how long of a period they cover.
  8. Home ownership is a consumption item. After taking into consideration, taxation and maintenance costs, you are often better renting.
  9. Never pay more than 15 years fair rental value for any residence.
  10. Multiply monthly house rent by 150(12.5 years)=fair value of the property.
  11. Small and value stocks generally have slightly higher returns than the market. This effect is however variable and both small and value stocks can under perform for a decade or more
  12. Design your portfolios so that you do not die poor rather than trying to make you very rich.
  13. Do not try to pick stocks or mutual funds or time the market.

The nature of the portfolio

  • Unless you diversify, you risk suffering the fate of post-1989 Japanese investors.
  • Four essential preliminaries: Save as much as you can, Have enough liquid taxable assets for at least 6 months, Diversify as widely as you can, Buy passive or index funds rather than stocks.
  • Two important decisions: Overall allocations to stocks and bonds, The allocation among stock asset classes
  • The rosiest scenario for the young investor is a long, brutal bear market. For the retiree, it most definitely not.
  • The most  important asset allocation decision is the overall stock/bond mix; start with age=bond allocation rule of thumb. Then modify allocation according to risk tolerance in the following manner.
Risk tolerance                              Adjust to the bond-age rule
Very high 20%
High 10%
Moderate 0%
Low -10%
Very low -20%
  • The best time to buy stocks is often when the economic clouds are the blackest, and the worst times to buy are when the sky is bluest.
  • Do not use mean variance optimisation to design real world portfolios.
  • The essence of portfolio construction is the combination of asset classes that move in different directions at least some of the time.
  • 80/20, 70/30( probably best) or 60/40 domestic/foreign
  • Some other asset classes that may be added: REITS( not more than 10% of equity allocation), foreign developed, emerging, small and value. These complex allocations are only suitable for large portfolios.

The enemy in the mirror

  1. Nothing is more likely to make you poor than your own emotions; nothing is more likely to save your finances than learning how to use cool, dispassionate reason to hold these emotions in check.
  2. Learn to automatically mistrust simple narrative explanations of complex economic or financial events. there is no substitute for quantitatively estimating expected stock and bond returns
  3. If you want excitement and novelty in your life, it is far safer and cheaper to take up skydiving than to seek it in your investment portfolio.
  4. Nations with the most rapidly growing economies often have the lowest stock returns. Good companies are usually not good stocks.
  5. Nothing lasts for ever: More often than not, recent extraordinary economic and financial events tend to reverse.
  6. You are not as good looking, as charming, or as good as a driver as you think you are. The same goes for your investing abilities. In an environment filled with incredible smart, hard-working and well-informed participants, the smartest trading strategy is not to trade at all. Regard yourself as average. When buying or selling a stock or bond, consider who you are trading against.
  7. Regularly rebalance your portfolio. This forces you to buy low and sell high.
  8. Do not see patterns where none exist; most of what happens in the financial market in the short term is random noise.
  9. Do not crave fancy investment vehicles. Plain vanilla index funds will nourish your retirement.

Muggers and worse

  • The average stock broker services his clients in the same way that Baby Face nelson( a bank robber) serviced banks.
  • Unlike your doctor, lawyer or accountant, your broker is not a fiduciary: that is, he is under no legal obligation to place your interests above his own.
  • Do not invest with any mutual fund family that is owned by a publicly traded parent company. If you have no choice, then invest in exchange traded funds with lowest cost.

Building your portfolio

  1. Purchase longevity insurance by postponing Social Security until age 70, and perhaps by adding a commercial immediate fixed annuity( if you need to spend more than 4% of your nest egg in retirement each year) as well.
  2. Buy funds and ETF from Vanguard.
  3. Use dollar cost averaging ( equal amounts each month) or value averaging( target amounts each month)
  4. Rebalance your portfolio approximately once every few years. More than once a year is probably too often. in taxable portfolios, do so even less frequently.
  5. The most important financial bequest to your heirs will not be cold hard cash, but rather the ability to save, spend and invest prudently. Reward frugality, create bank accounts and investment portfolio.
  6. A simple three fund portfolio(US, international and bonds) will do well for most of us.

Books recommended


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