In Chapter 3, “The Market Is Smarter Than You Are” Bernstein lays out the case for the Efficient Market Hypothesis and that stock picking is impossible. He details how its somewhat possible to beat market returns by becoming active in the management of the companies you buy (ala Warren Buffet) or by managing small funds and working hard (ala Peter Lynch). He makes the case that its possible to find mis-priced equities, but that its a lot of work and will only give you a slightly improved return (for most people their efforts would be more lucratively applied elsewhere).
By the end of this chapter Bernstein had me doubting the Derek Foster approach to investing. I believe what Bernstein is debunking is the idea of buying stocks then reselling them a future date based on “superior knowledge” that its under-priced currently and will be over-priced in the future (and that you’ll be able to tell when that occurs). I’m hopeful that buying tax-advantaged income producing stocks (with no intention of selling them) is a different game.
Chapter 4 details asset allocation and how its possible to combine asset classes to decrease volatility and IMPROVE returns. Its a little confusing as he discounts historical records of returns, but then believes historical records of risk (he claims one is valid but the other isn’t and I wasn’t able to follow his reasoning on this point). I posted on this subject previously and he made a good case of convincing me that asset allocation is one of the best places for investors to spend their time / mental energy.