These are my comments from Chapter 1 of our currently featured book The Four Pillars of Investing by William Bernstein. I will not be reviewing the contents of each chapter. Instead, I will be extracting a limited number of quotes of great significance today. They will not even be close to being comprehensive. They should stimulate thought: sometimes because they have turned out to be wrong.
One thing that I will be looking for is where William Bernstein's numbers come from. I have found that he provides numerous plausibility arguments rules of thumb to show that they are reasonable. But I have found it difficult to find out exactly where his numbers come from.
As it turns out, this was not an issue in Chapter 1. He identified his data sources adequately.
The following is critically important when looking at graphs showing the long-term growth of the stock market. Refer to page 5, Figure 1-1:
This is on page 20:Figure 1-1 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. The Great Depression, during which stocks lost more than 80% of their value, is just barely visible.
From page 34:The monetary shocks of the twentieth century are among the most severe in recorded economic history, and it is more likely that inflation-adjusted bond returns going forward will be closer to the 3% to 4% rate of the previous centuries, than to the near-zero rate of the last ninety years.
From page 35:In addition, the small stock advantage is extremely tenuous... it is less than a percent-and-a-half per year, and there have been periods of more than 30 years when large stocks have bested small stocks.
From page 39:Thus, the logic of the market suggests that:
Good companies are generally bad stocks, and bad companies are generally good stocks.
Have fun.Be especially wary of data demonstrating the superior long-term performance of U.S. stocks.
John R.