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It is a journey, and along the way are stockbrokers, journalists, and mutual fund companies whose interests are diametrically opposed to yours. More relevant today than ever, The Four Pillars of Investing shows you how to determine your own financial direction and assemble an investment program with the sole goal of building long-term wealth for you and your family.
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Privacy policy. Great intelligence and good luck are not required. Straightforward in its presentation and generous in its real-life examples, The Four Pillars of Investing presents a no-nonsense discussion of:The art and science of mixing different asset classes into an effective blend The dangers of actively picking stocks, as opposed to investing in the whole market Behavioral finance and how state of mind can adversely affect decision-making Reasons the mutual fund and brokerage industries, rather than your partners, are often your most direct competitors Strategies for managing all of your assets - savings, k s, home equity - as one portfolio Investing is not a destination.
It has become a commonplace that stocks are the best long-term investment for the average citizen. Unfortunately, for a number of reasons, no person, family, or organization ever obtained these returns. First, we invest now so that we may spend later. In fact, this is the essence of investing: the forbearance of immediate spending in exchange for future income.
Because of the mathematics of compound interest, spending even a tiny fraction on a regular basis devastates final wealth over the long haul. Few investors have the patience to leave the fruits of their labor untouched. And even if they did, their spendthrift heirs would likely make fast work of their fortune.
But even allowing for this, Figure is still highly deceptive. Even more importantly, it ignores survivorship bias. This term refers to the fact that only the best outcomes make it into the history books; those financial markets that failed do not. It is no accident that investors focus on the immense wealth generated by the economy and markets of the United States these past two centuries; the champion—our stock market—is the most easily visible, while less successful assets fade quickly from view.
And yet the global investor in would have been hard pressed to pick out the United States as a success story. At its birth, our nation was a financial basket case. And its history over the next century hardly inspired confidence, with an unstable banking structure, rampant speculation, and the Civil War.
The nineteenth century culminated in the near bankruptcy of the U. Treasury, which was narrowly averted only through the organizational talents of J. Worse still, for most of the past years, stocks were inaccessible to the average person. Before about , it was virtually impossible for even the wealthiest Americans to purchase shares in an honest and efficient manner.
Worst of all, in the year , the good news about historically high stock returns is out of the bag. For historical reasons, many financial scholars undertake the serious study of U. Stocks today are selling at nearly ten times that valuation, making it unlikely that we will witness a repeat of the returns seen in the past years.
Finally, there is the small matter of risk. Figure is also deceptive because of the manner in which the data are displayed, with an enormous range of dollar values compressed into its vertical scale. Likewise, the — bear market, during which stocks lost more than one-half of their after-inflation value, is seen only as a slight flattening of the plot.
And the October market crash is not visible at all. All three of these events drove millions of investors permanently out of the stock market. For a generation after the crash, the overwhelming majority of the investing public shunned stocks altogether.
The popular conceit of every bull market is that the public has bought into the value of long-term investing and will never sell their stocks simply because of market fluctuation. And time after time, the investing public loses heart after the inevitable punishing declines that stock markets periodically dish out, and the cycle begins anew.
Ultimately, this book is about the building of investment portfolios that are both prudent and efficient. The construction of a house is a valuable metaphor for this process. The very first thing the wise homebuilder does, before drawing up blueprints, digging a foundation, or ordering appliances, is learn about the construction materials available.
In the case of investing, these materials are stocks and bonds, and it is impossible to spend too much time studying them. We will expend a lot of energy on the several-hundred-year sweep of human investing—a topic that some may initially find tangential to our ultimate goal. Rest assured that our efforts in this area will be well rewarded. For the better we understand the nature, behavior, and history of our building materials, the stronger our house will be.
It is not possible to precisely predict the future, but a knowledge of the past often allows us to identify financial risk in the here and now. Returns are uncertain. But risks, at least, can be controlled. We tend to think of the stock and bond markets as relatively recent historical phenomena, but, in fact, there have been credit markets since human civilization first took root in the Fertile Crescent.
And governments have been issuing bonds for several hundred years. More importantly, after they were issued, these bonds then fluctuated in price according to economic, political, and military conditions, just as they do today. Financial history provides us with invaluable wisdom about the nature of the capital markets and of returns on securities.
Intelligent investors ignore this record at their peril. Risk and Return Throughout the Centuries Even before money first appeared in the form of small pellets of silver 5, years ago, there have been credit markets. It is likely that for thousands of years of prehistory, loans of grain and cattle were made at interest; a bushel or calf lent in winter would be repaid twice over at harvest time.
Such practices are still widespread in primitive societies. When gold and silver first appeared as money, they were valued according to head of cattle, not the other way around. But the invention of money magnified the prime question that has echoed down through investment history: How much return should be paid by the borrowers of capital to its lenders? The reason for their relevance is simple.
Two Nobel Prize-winning economists, Franco Modigliani and Merton Miller, realized more than four decades ago that the aggregate cost of and return on capital, adjusted for risk, are the same, regardless of whether stocks or bonds are employed. In other words, had the ancients used stock issuance instead of debt to finance their businesses, the rate of return to investors would have been the same.
So we are looking at a reasonable portrait of investment return over the millennia. The history of ancient credit markets is fairly extensive. In fact, much of the earliest historical record from the Fertile Crescent—Sumeria, Babylon, and Assyria—concerns itself with the loaning of money.
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