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Dr Bernstein's 8 prescriptions

Neurologist turned investment guru, William J Bernstein offers up some truly insightful prescriptions to investors. Read on for some investment therapy

Dr Bernstein's 8 prescriptions

Few medics in history have turned their attention to financial ailments but William Bernstein happens to be one of them. A former practicing neurologist who has written several popular books on investing, he also runs an investment service for clients worth at least $25 million. The Investor's Manifesto, a superbly insightful work is aimed at people with little background in finance or mathematics. Here are its major themes in Bernstein's own words:

  1. For anxiety syndrome: The rewards of equity ownership are paid for in the universal currencies of financial risk: stomach acid and sleepless nights
  2. On valuations: Good companies most often are bad stocks and bad companies, as a group, are good stocks.
  3. On expecting the unexpected: On October 19, 1987, the S&P 500 fell by 20.46% and the Dow Jones Industrial Average by 22.61% approximately 23 standard deviation events for a one day period which has, about the same odds as your house undergoing a spontaneous quantum decomposition and reassembling itself in a neighbouring galaxy.
  4. On why a portfolio shouldn't be all equity: Suppose that God does not exist, then all the devout believer has lost is the opportunity to fornicate, imbibe and skip a lot of boring church sevices. But if God does exist, then the atheist roasts eternally in Hell.
  5. On why future expectations should trump past data: In a classic example of this phenomenon, one researcher found a near perfect relationship between S&P 500 returns and the level of butter production in Bangladesh.
  6. On using expected dividends to value stocks: Milk from the cows, eggs from the hens. A stock, by God, for its dividends.
  7. On overconfidence: A recent poll shows that 64% of Americans believe that they are going to heaven, versus only 0.5% who will be traveling in the opposite direction when the time comes.
  8. On Brokers: Most seek employment at brokerage houses, hedge funds and mutual funds for the same reason Willie Sutton supposedly offered for robbing banks - because that's where the money is.

Title: The Investor's Manifesto - Preparing for Prosperity, Armageddon and Everything in Between
Author: William J Bernstein
Published: John Wiley & Sons, Inc