Monday, June 16, 2008

THE FOUR PILLARS OF INVESTING




Anyone interested in managing their own investments should read this book by William Bernstein. Pillar One is The Theory of Investing. Pillar Two is The History of Investing. Pillar Three is The Psychology of Investing, and Pillar Four is The Business of Investing. He concludes the book by discussing investment strategy using the four pillars.

(Go here to read a recent magazine interview where he discusses investment strategy.)

The chapter on a history of manias goes back in history and highlights some incredible times in the past when whole societies were caught up in investment madness. The end result was always a crash. Our recent housing bubble has a lot of similarities to past manias. We definitely can learn lessons today by studying examples from the past.

Bernstein does not have kind words for financial brokers. The reason is that anyone with the time to educate themselves doesn't need to pay commissions to an adviser. In fact, that is the only reason to ever have a broker. Everyone else can do it on their own. The only reason I have a job as a financial representative is because there are a lot of people who, for one reason or another, are not educated and are not interested in doing their own investing.

Read the book, and use it to jump start your education.




Monday, June 9, 2008

APPEASEMENT

One of the best articles I have ever read on the dangers of appeasement appeared in the June 7th 2008 issue of the Wall Street Journal. It is by Michael Ledeen, a resident scholar at the American Enterprise Institute. I have pasted it below in its entirety. Let me know if you agree or disagree.



Resident Scholar Michael A. Ledeen

Ever since World War II, we have been driven by a passionate desire to understand how mass genocide, terror states and global war came about--and how we can prevent them in the future.
Above all, we have sought answers to several basic questions: Why did the West fail to see the coming of the catastrophe? Why were there so few efforts to thwart the fascist tide, and why did virtually all Western leaders, and so many Western intellectuals, treat the fascists as if they were normal political leaders, instead of the virulent revolutionaries they really were? Why did the main designated victims--the Jews--similarly fail to recognize the magnitude of their impending doom? Why was resistance so rare?
Why are we failing to see the mounting power of evil enemies? Why do we treat them as if they were normal political phenomena, as Western leaders do when they embrace negotiations as the best course of action?
Most eventually accepted a twofold "explanation": the uniqueness of the evil, and the lack of historical precedent for it. Italy and Germany were two of the most civilized and cultured nations in the world. It was difficult to appreciate that a great evil had become paramount in the countries that had produced Kant, Beethoven, Dante, and Rossini.
How could Western leaders, let alone the victims, be blamed for failing to see something that was almost totally new--systematic mass murder on a vast scale, and a threat to civilization itself? Never before had there been such an organized campaign to destroy an entire "race," and it was therefore almost impossible to see it coming, or even to recognize it as it got under way.
The failure to understand what was happening took a well-known form: a systematic refusal to view our enemies plain. Hitler's rants, whether in "Mein Kampf" or at Nazi Party rallies, were often downplayed as "politics," a way of maintaining popular support. They were rarely taken seriously as solemn promises he fully intended to fulfill. Mussolini's call for the creation of a new Italian Empire, and his later alliance with Hitler, were often downplayed as mere bluster, or even excused on the grounds that, since other European countries had overseas territories, why not Italy?
Some scholars broadened the analysis to include other evil regimes, such as Stalin's Russia, which also systematically murdered millions of people and whose ambitions similarly threatened the West. Just as with fascism, most contemporaries found it nearly impossible to believe that the Gulag Archipelago was what it was. And just as with fascism, we studied it so that the next time we would see evil early enough to prevent it from threatening us again.
By now, there is very little we do not know about such regimes, and such movements. Some of our greatest scholars have described them, analyzed the reasons for their success, and chronicled the wars we fought to defeat them. Our understanding is considerable, as is the honesty and intensity of our desire that such things must be prevented.
Yet they are with us again, and we are acting as we did in the last century. The world is simmering in the familiar rhetoric and actions of movements and regimes--from Hezbollah and al Qaeda to the Iranian Khomeinists and the Saudi Wahhabis--who swear to destroy us and others like us. Like their 20th-century predecessors, they openly proclaim their intentions, and carry them out whenever and wherever they can. Like our own 20th-century predecessors, we rarely take them seriously or act accordingly. More often than not, we downplay the consequences of their words, as if they were some Islamic or Arab version of "politics," intended for internal consumption, and designed to accomplish domestic objectives.
Clearly, the explanations we gave for our failure to act in the last century were wrong. The rise of messianic mass movements is not new, and there is very little we do not know about them. Nor is there any excuse for us to be surprised at the success of evil leaders, even in countries with long histories and great cultural and political accomplishments. We know all about that. So we need to ask the old questions again. Why are we failing to see the mounting power of evil enemies? Why do we treat them as if they were normal political phenomena, as Western leaders do when they embrace negotiations as the best course of action?
No doubt there are many reasons. One is the deep-seated belief that all people are basically the same, and all are basically good. Most human history, above all the history of the last century, points in the opposite direction. But it is unpleasant to accept the fact that many people are evil, and entire cultures, even the finest, can fall prey to evil leaders and march in lockstep to their commands. Much of contemporary Western culture is deeply committed to a belief in the goodness of all mankind; we are reluctant to abandon that reassuring article of faith. Despite all the evidence to the contrary, we prefer to pursue the path of reasonableness, even with enemies whose thoroughly unreasonable fanaticism is manifest.
This is not merely a philosophical issue, for to accept the threat to us means--short of a policy of national suicide--acting against it. As it did in the 20th century, it means war. It means that, temporarily at least, we have to make sacrifices on many fronts: in the comforts of our lives, indeed in lives lost, in the domestic focus of our passions--careers derailed and personal freedoms subjected to unpleasant and even dangerous restrictions--and the diversion of wealth from self-satisfaction to the instruments of power. All of this is painful; even the contemplation of it hurts.
Then there is anti-Semitism. Old Jew-hating texts like "The Protocols of the Elders of Zion," now in Farsi and Arabic, are proliferating throughout the Middle East. Calls for the destruction of the Jews appear regularly on Iranian, Egyptian, Saudi and Syrian television and are heard in European and American mosques. There is little if any condemnation from the West, and virtually no action against it, suggesting, at a minimum, a familiar Western indifference to the fate of the Jews.
Finally, there is the nature of our political system. None of the democracies adequately prepared for war before it was unleashed on them in the 1940s. None was prepared for the terror assault of the 21st century. The nature of Western politics makes it very difficult for national leaders--even those rare men and women who see what is happening and want to act--to take timely, prudent measures before war is upon them. Leaders like Winston Churchill are relegated to the opposition until the battle is unavoidable. Franklin Delano Roosevelt had to fight desperately to win Congressional approval for a national military draft a few months before Pearl Harbor.
Then, as now, the initiative lies with the enemies of the West. Even today, when we are engaged on the battlefields of Iraq and Afghanistan, there is little apparent recognition that we are under attack by a familiar sort of enemy, and great reluctance to act accordingly. This time, ignorance cannot be claimed as an excuse. If we are defeated, it will be because of failure of will, not lack of understanding. As, indeed, was almost the case with our near-defeat in the 1940s.

Michael A. Ledeen is a resident scholar at AEI.