The Nature of the Beast
No balls, no blue chips.
—Old Wall Street adage
If you learn nothing else from this book, it should be that risk and return are inextricably intertwined. In almost every country where economists have studied securities returns, stocks have had higher returns than bonds.1 Further, if you want those high stock returns, you are going to have to pay for them by bearing risk; this is a polite way of saying that in the course of earning those higher returns, your portfolio is going to lose a truckload of money from time to time. Conversely, if you desire perfect safety, then resign yourself to low returns. It really cannot be any other way.

Of Ravens and Returns

Let’s start our journey through the land of risk and return by imagining a clear, crisp winter afternoon in the halcyon days of late 1998. You are out for a stroll, and as your thoughts turn to your financial health, your mood elevates. Your portfolio, which consists of a mix of judiciously picked stocks and bonds, has doubled in value during the roaring bull market of the past four years. While you have not done as well as your acquaintances, who are flush with dot-com options and aggressive tech funds, your modest portfolio has landed you squarely on the road to a comfortable retirement.
Suddenly, a winged creature lands on your shoulder. Ah, you say to yourself optimistically, the bluebird of happiness! Well, no; closer inspection reveals plumage of a darker hue. “Hello,” it intones gravely, ...

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