Peter Bernstein

“Paradigm shifts are an inevitable result of forecast errors — the raw material from which paradigm shifts are fashioned.”

“Economic development or growth occurs in three different processes: in the increase of population, in the accumulation of capital, and in the technological progress which enables us to produce more things, better things, different things, or the same things more cheaply.”

“Although expectations of the future are supposed to be the driving force in the capital markets, those expectations are almost totally dominated by memories of the past. Ideas, once accepted, die hard.”

“A few holdings with radically different types of market behavior will do more to smooth out the pattern of portfolio returns than 50 or 100 holdings that move up and down together.”

“If we take a long look at the performance of common stocks over recorded market history, we find that they have indeed been a good investment — providing, of course, that the investor has had a hundred years or so to play the market.”

“Volatility is often a symptom of risk but is not a risk in and of itself. Volatility obscures the future but does not necessarily determine the future.”

“Risk means the chance of being wrong — not always in an adverse direction, but always in a direction different from what we expected.”

“It is not the market that is rising or falling at any moment, even if we commonly speak as though it were. In truth, prices move in response to the buying and selling decisions of countless investors, who are constantly considering the likely decisions of countless others”

“Risk management means protecting oneself from the adverse and unexpected decisions others may make and, in the process, making better decisions than they do.”

“What’s comfortable is not the right way to invest. You must own things that you’re uncomfortable with. Otherwise you’re not really diversified.”

“Humility is an enormously important quality. You can’t win without it. Survival in the end is where the winners are by definition, and survival begins with humility.”

“Liquidity does not exist unless someone else is willing to give you cash in exchange for the piece of paper you want to sell.”

“The more irreversible the decisions, the more expensive the consequences of being wrong.”

“The history of markets is one of overreaction in both directions.”

“Volatility matters, because it defines the uncertainty of the price at which an asset will be liquidated.”

“To me, the primary task in investing is to test and then retest some more the parameters and paradigms that appear to govern daily events. Betting against them is dangerous when they look solid, but accepting them without question is the most dangerous step of all.”

“Deregulation only works when everybody is virtuous and flexible.”

“The enchantment which some growth companies convey to the stock market lends a premium to their common stocks which is not always justified by the statistical background.”

“The ability to create its own market is the strategic, the dominating, and the single most distinguishing characteristic of a true growth company.”

“In investing, nothing beats the discovery of an undervalued stock, no matter what the nature of its business or the past trend of its earnings.”

“The P/E ratio is only a reflection of what most investors expect to happen at a point in time, and that is neither here nor there in terms of what actually will happen.”

“Neither the corporate executive nor the investment manager can allow himself to be lulled into the belief that any company, regardless of its record of achievement, must necessarily provide satisfactory rates of growth.”

“Past corporate successes are only frail guides to future good fortune.”

“All stocks are “two-decision” stocks; and no such thing as a “one-decision” stock exists.”

“Liquidity is a concern of the short-term investor and a minor matter for the long-term investor.”

“The lesson of history is that norms are never normal forever. Paradigm shifts belie blind faith in regression to the mean.”

“The road to successful investing is paved with independence of spirit, decisiveness, and the courage of one’s convictions.”

“While majority opinion can give any market movement considerable momentum that keeps it going in the same direction, majority opinion is inevitably and consistently wrong at turning points.”

“Stock prices reflect the obvious, not the obscure.”

“The history of the stock market shows many periods of twenty years or more when stock prices ended up precisely where they began.”

“Many years ago, an older partner taught me to distinguish between outcomes that are unlikely and outcomes that are catastrophic. The latter are to be avoided even if the odds on them are tiny.”

“Financial markets are a kind of time machine that allows selling investors to compress the future into the present and buying investors to stretch the present into the future.”

“The whole institutional structure of the marketplace rests on the assumption that the other side of the trade will always be there; without that assumption, even the gutsiest of market-makers would refuse to stay in business.”

“In the end, risk management is about consequences.”

“History shows us, over and over, that bull markets can go well beyond rational valuation levels as long as the outlook for future earnings is positive.”

“The greatest tragedies occur when people forget about uncertainty.”

“Equities are a claim on uncertain future earnings.”

“So long as a capitalist system persists and the financial markets hold together, equities do have a built-in long-term rate of return. That rate of return is a nominal measure of the economy.”

“Rational investors will part with their cash only when they believe they are properly compensated for the loss of liquidity and the pain of disquietude.”

“Real life is not a random draw but a connected sequence of events in which each event is the consequence of the preceding event.”

“Prices change when events are different from what the market has expected them to be.”

“Our expectations of the future are not unbiased and do not reflect all available information.”

“Your wealth is in many ways dependent on what other people will pay for your assets.”

“Performance measurers seek benchmarks the way bees seek honey.”

“The biggest risk is not knowing what you are doing.”

“Managers do not create large alphas by being conventional. They do so by taking the risk of being wrong and alone.”

“We naturally fear the unknown, and the future is always unknown.”

“Diversification of risk matters not just defensively, but because it maximizes returns as well, because we expose ourselves to all of the opportunities that there may be out there.”

“No matter how calm you are, no matter how long term an investor you are, no matter what your horizons, when the market is jumping around, you feel uncertainty in your gut and it’s hard to resist that.”

“Volatility gets you in the gut. There’s no question that when prices are jumping around, you feel different from when they’re stable.”

“The times I have been most wrong are the times I thought I was most right.”

“The main thing that experience taught me was a sense of humility and an awareness of the importance of surprise, that is, unexpected things happen.”

“The most important lesson an investor can learn is to be dispassionate when confronted by unexpected and unfavorable outcomes.”

“Being wrong on occasion is inescapable.”

“Survival as an investor over that famous long course depends from the very first on recognition that we do not know what is going to happen. We can speculate or calculate or estimate, but we can never be certain.”

“All of history and all of life is stuffed full of the unexpected and the unthinkable.”

“Even the most serious efforts to make predictions can end up so far from the mark as to be more dangerous than useless.”

“The constant lesson of history is the dominant role played by surprise. Just when we are most comfortable with an environment and come to believe we finally understand it, the ground shifts under our feet.”

“Unless you are that rarest of birds, someone who is cool under the rapid-fire, high-pressure decision making required to maximize your returns, let others take such risks, and allow your portfolio to plug along at a slower speed. In investing, tortoises tend to win far more often than hares over the turns of the market cycle.”

“Few decisions in life motivated by greed ever have happy outcomes.”

“Volatility provokes the constant dread that some investors know more than we do, making us fearful of ignoring such powerful price movements.”

“Many people pride themselves on being “long-term investors,” but acting deliberately when prices are bouncing around is not so easy.”

“Markets are shaped by what I call “memory banks.” Experience shapes memory; memory shapes our view of the future.”

“While we can learn from the long run about how bonds and stocks respond to changing environments and to each other, the long run can tell us perilously little about what kinds of environments lie ahead.”

“The long run is a benchmark that helps us to understand the short run, where nothing ever stands still.”

“Faith in the long run is the most powerful force that drives investment decisions.”

“Consequences, not probabilities, determine the decisions that matter.”

“Risk in our world is nothing more than uncertainty about the decisions that other human beings are going to make and how we can best respond to those decisions.”

“In the end, the value of your portfolio is not what somebody tells you is likely to happen over the long run but how much other investors out there are going to be willing to pay you for your assets.”

“The fact is that strategies that perform sub-optimally under certain market conditions can work surprisingly well in others.”

“What other people are doing in the market is not relevant to what you’re doing.”

“At its root, risk is about mystery. It focuses on the unknown, for there would be no such thing as risk if everything were known.”

“Risk is about how we make decisions, and only incidentally about the math that we employ to reach those decisions.”

“Risk is about dealing with problems to which there is no certain solution.”

“Investing for the long run works only as long as people don’t believe it.”

“You can’t forecast multiples.”

“When inflation is low, you feel that you know more about the future, and are much more willing to take risks.”

“Risk-taking is an inevitable ingredient in investing, and in life, but never take a risk you do not have to take.”

“I view diversification not only as a survival strategy but as an aggressive strategy, because the next windfall might come from a surprising place.”

“Survival is the only road to riches.”

“There is evidence that the stock market is more efficient in processing information about what other investors are doing than it is in processing fundamental information about the underlying assets, which is why stock prices so often turn out with hindsight to have been crazy rather than rational.”

“It’s not uncertainty as such that bothers us, but unknowledge.”

“The greatest risks are the risks that we don’t see and the most difficult problem is in preparing in advance for that kind of thing.”

“The trick in risk management is in recognizing that normal is not a state of nature, but a state of transition and that trend is not destiny.”

“The only time you’re really diversified is when you have assets you don’t want to own.”

“I don’t think volatility is an altogether irrelevant proxy for risk, even though, to a cool, dispassionate investor with a long-term time horizon, volatility is wonderful.”