Episode #35 - Four Pillars of Investing
A new leaf in the #Winnings tradition.
Intro:
Long-timers and first-timers, welcome! This episode marks a year since I started typing Winnings, and I’m thrilled that you’re still a part of this experiment. I took a couple week hiatus from this dispatch, and I used the time to consider how to best use your time that you dedicate to reading this letter. I decided to try a new model: The Book Club.
I think breaking into a good book on topics regarding finance will likely yield more long-term learning for you and me and will get you further along into a life of financial literacy.
The first book is The Four Pillars of Investing by William J. Bernstein (I googled it for you. You can decide if you’d like to buy it and where you prefer to purchase it from. It ranges from $6-$40 depending on its condition.)
Because I knew the book this week and you didn’t, I will start by just sharing a short summary of the introduction so you can have a chance to decide if you want to join this journey. Even if you don’t buy the book, you’re certainly encouraged to follow along, comment, and respond if you have any questions, and continue to build your financial literacy with Winnings. If you’re new, please check out the archive. Regardless, do share this letter with a friend!
The Meat:
As the book’s title suggests, there are four pillars in Bernstein’s mind when it comes to investing. Upon these pillars you can build a sound investing strategy.
Theory
Risk, Risk, Risk. Just like in Risk the Game™, investing rewards are almost always correlated to the risk you are willing to take. We’ll cover more of this in upcoming episodes.
For those familiar…this was not filmed on shabbat.
History
Bernstein’s line on history in the intro is priceless: “Put a different way, a physician, physicist, or a chemist who is unaware of their discipline’s history does not suffer greatly from the lack thereof; the investor who is unaware of financial history is irretrievably handicapped.” Sorry to disappoint the anti-historians on this list, but you gotta get ready for some lessons in the weeks to come.
Psychology
Homo Economicus is the ultimate stumbling block utilized in the study of economics. Many economists construct their recommendations assuming that people follow the MOST rational approach to decision making around their finances. However, almost all actual humans do not follow rational economic thinking. Knowing this reality by dint of reading this far into this letter puts you ahead of the vast majority of people in the world and gives you a leg up in the realm of investing.
Business
For the skeptics among us, this principle isn’t hard to follow. For those who like to think people that ostensibly provide you a service have your best interests in mind, this is a harder pill to swallow: Any service you use to buy or sell stocks is in it to make money for themselves. If you make money too, great, but they ultimately have owners/shareholders to keep happy. Those owners/shareholders likely come before you when it comes to who they care about. The sooner you understand this principle, the sooner you see it and can avoid the pitfalls of those conflicts of interest.
Takeaway:
F. Scott Fitzgerald wrote:
“The test of a first-rate intelligence is the ability to hold two opposing ideas in mind at the same time and still retain the ability to function.
For the purposes of this book exercise, you’ll need to hold four ideas in your mind, though not always opposing one another.
Interact:
Which of the four pillars do you think is most important?
Is there one of the pillars that you are most drawn to or interested in learning more about?
Pick up a copy of the book, and stay tuned for the next installment of Winnings!
Gratitude:
Special shout-out of gratitude to my father-in-law, Michael S., who shared The Four Pillars of Investing with me a few years ago and going through it again will hopefully help me gain an even deeper understanding of the material and relay it to you.
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Please remember, I’m not providing professional advice about personal finance. I’ve got a lot of friends who do that and you can totally hit me up for an intro if you’d like - I don’t get any commission - just the happiness that my readers are taking their financial health seriously.