The Four Pillars of Investing summary

Modern stock markets emerged in seventeenth-century Europe. Brokers gathered in coffeehouses in London's Change Alley, buying and selling shares. These primitive exchanges laid the groundwork for sophisticated modern markets.

New financial tools soon enabled public investment in emerging technologies. In 1687, investor William Phipps returned from a voyage salvaging Spanish treasure, captivating the public. Patents proliferated for diving bells to find shipwrecks. Speculators snapped up shares in these diving companies, igniting England's first technology bubble. Only Phipps delivered returns; the rest were fantasies. Investor Daniel Defoe, better remembered today as the author of Robinson Crusoe, went bankrupt on diving company scams.

A fundamental assumption of economics is that people behave rationally in their own self-interest when making financial decisions. But abundant evidence proves otherwise – irrationality often prevails, and we frequently act as our own worst enemies as investors. Until recent decades, the field of finance largely ignored the havoc irrational behaviors wreak on investment returns.

In the 1970s, economist Richard Thaler pioneered the discipline of behavioral economics, which studies the many irrational ways people mismanage money. Thaler began by cataloging everyday contradictions, like braving a blizzard to drive to an event just because you’ve already paid for it. Conventional finance theories assume rationality, but real-world observations reveal people consistently act against their own financial interests. A concert ticket worth a couple of hundred dollars is often enough for people to get in their cars and risk death on icy highways. 

Triumphing over our hardwired investing shortcomings is immensely challenging yet essential. With consistent effort and self-awareness, we can temper these natural impulses and greatly improve our returns. Let’s take a look at six sound strategies you can start applying today. 

First off, avoid overconfidence by clearly recognizing the folly of believing you alone can beat the market's ruthless professionals. Historical data conclusively proves even most savvy investment managers fail to match market returns over time, much less exceed them. What makes you so sure you are the rare exception who finds the elusive holy grail? Be honest with yourself – the market is far smarter and more efficient than any individual investor can ever be. There are countless professionals ceaselessly searching for an advantage. Your odds of success are miniscule in comparison. Admit that the market is smarter than you, and join it as efficiently as possible rather than futilely attempting to beat it. Index funds are the most liberating investment innovation ever created – they allow anyone to match market returns and triumph over the majority of professionals who fail in their efforts to exceed it.