The Four Pillars of Investing: Business of Investing
Over the past couple of weeks, we’ve been looking at the principles in The Four Pillars of Investing by William Bernstein, using a post from Get Rich Slowly as a guide. So far, we’ve looked at the theory of investing, history of investing and the psychology of investing. Today’s topic is understanding the business of investing.
Pillar Four: Business of Investing
One of the things that many investors do not pay much attention to is the way investing — as business — works. I like that Bernstein gives readers a course in how investing works in business terms. And, of course, the point of a business is to get your money. The investing industry is no different in that regard. Fees and commissions are designed to earn money for brokerages, mutual fund administrators and other money managers.
Another interesting point that Bernstein makes is that there are other forces at work that can deplete your earnings: inflation and paying attention to sensationalist stories in financial media.
Inflation is the obvious culprit. It erodes your earning power and reduces your returns. Media sensationalism is a little less obvious. Get Rich Slowly describes it thus:
Meanwhile, traditional financial journalism tends to hype hot mutual funds and brokerage houses — spreading what some people call “financial pornography” — in order to boost sales.
This is an interesting point. After all, the herd mentality often leads one wrong. It is often best to consider market performance and fundamentals, rather than rely on talking heads and “experts” whose main purpose is to garner ratings.
Disclaimer: I am not an investment professional. Nothing in this piece or on this Web site should be construed as investment advice. Before making investment decisions, do your own research and/or consult with an investment professional. All investment comes with the risk of loss. You are responsible for your own investment decisions.
