Investing smart is a ‘no-brainer’

Investing smart is a ‘no-brainer’, according to William Bernstein, a neurologist by trade but who also happens to be one of the more lucid and influential of market thinkers. He has explained his philosophy in such important books as The Four Pillars of Investing and The Intelligent Asset Allocator.

Dr. Bernstein was quoted in several comments in “The Globe and Mail” article “Investing smart is a ‘no-brainer,’ at least to this neurologist”. The following are some of the interesting excerpts from the article:

Smart investors ignore the economy, market sentiment and all strategists employed by investment firms, said Dr. Bernstein, who has long been a thorn in the side of active fund managers, Street analysts and peddlers of exotic exchange-traded funds and other vehicles designed more to enrich their architects than to reward their investors.

“I recommend a passive approach,” he said the other day in an e-mail exchange. “That is, I do not believe that there’s such a thing as skill in security selection, and I favour vehicles that transact as little as possible.”

His “no-brainer” portfolio of indexed funds regularly beats the market by a wide margin. Why? “Because it’s well-diversified, biased towards small and value stocks and passive.”

He doesn’t pull any punches when talking about such pet peeves as hedge fund managers and investment bankers, prospects for commodities or the current mania for the BRIC countries – Brazil, Russia, India and China.

On hedge funds: “The best vehicle known to man for separating country club members from their wealth.”

On bankers: “Bankers seem to have the attention span of a kindergarten class. I give them another five years before they’re back to playing the same melody with different instruments.”

On BRIC investing: “A wire-house gimmick. The correlations of these four nations to the returns of U.S. equities aren’t any different from Argentina, Turkey, Indonesia, Malaysia or the Philippines. If someone makes the point that the BRIC nations have high growth rates, they might as well be wearing a bright red neon sign on their foreheads that flashes ‘I can’t read,’ since the correlation between economic growth and stock returns is negative.”

On commodities: In theory, a good portfolio diversifier. “But in practice, I don’t trust any of the vehicles currently available, and I’m also generally skeptical of any ‘asset class du jour,’ which commodities certainly are. The time to expose yourself to an asset class is when no one else is interested.”

I tend to agree with him. His book — “The Four Pillars of Investing” remains my all-time favorite investing book.

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