The Little Book of Common Sense Investing
Since this Little Book’s first publication in 2007, John C. Bogle’s investment principles have endured and served investors very well. When Bogle speaks (or writes) – people listen. Bogle knows a thing or two about investing. He is the founder and former chairman of the Vanguard Group. After creating Vanguard in 1974, he served as chairman and chief executive officer until 1996, and senior chairman until 2000. At the time of this post, Vanguard Group manages an astounding $4 trillion+ in assets. It is unequivocally one of the world’s largest investment companies, offering a large selection of low-cost mutual funds, Exchange Traded Funds (ETFs), portfolio advice, and related services.
The premise of Bogle’s common sense investing book is simple: a portfolio constructed of index funds is the only investment that effectively guarantees an investor of their fair share of stock market returns. This strategy is so beloved by investing oracle Warren Buffett he said this of Bogle inside the book’s jacket:
“If a statue is ever erected to honor the person who has done the most for American investors, the hands-down choice should be Jack Bogle.”
Bogle believes common sense investing, via The Index Revolution as he calls it, will help investors collectively build a new and more efficient investment system, one that serves investors at its highest priority.
Strong and powerful words…about an investing strategy that is not yet dominant.
I finally got around to re-reading The Little Book of Common Sense Investing this fall. Here’s what I liked about it and what you, the investor, the reader of this site, should consider taking away from it.
On rational exuberance
“In our foolish focus on the short-term stock market distractions of the moment, we investors often overlook this long history.” Meaning, staying invested in the stock market (less minuscule money management fees) has delivered staggering growth. “Each dollar initially invested in stocks in 1900 at a return of 9.5 percent grew by the close of 2015 to $43,650.” While none of us expect to live 116 years, Bogle claims the descendants that follow us will enjoy the miracle that is compounding returns.
On the premise of indexing
“Returns earned in the stock market must equal the gross returns earned by all investors in the market.” Bogle therefore argues owning the stock market over the long-term is a winner’s game. Attempting to beat the stock market via individual stock selection is a loser’s game. This is because no matter how long (or short) the timeframe: the gross return in the stock market, minus intermediation costs, equals the net return by all investors as a group. So, whether markets are totally efficient, or not, indexing works.
On costs when it comes to investing
There are “relentless rules of humble arithmetic.” We investors as a group get precisely what we don’t pay for! Meaning if we pay next to nothing for our money management fees, via indexing, we get everything (in terms of stock market returns).
“Our system of financial intermediation has created enormous fortunes for those who manage other people’s money. Their self-interest will not soon change. But as an investor, you must look after your self-interest. Only by facing the obvious realities of investing can an intelligent investor succeed.”
Bogle reminds readers when it comes to investing, time doesn’t heal all wounds: “When returns are concerned, time is your friend. But where costs are concerned, time is your enemy.” With all things being equal, higher money management costs therefore make the difference between investment success and investment failure.
Bogle is a fan of the Dividend Growth Investor blog; he does not dismiss dividends as an important part of investor gross returns:
On the grand illusion
Surprise, surprise! The grand illusion is this: there are dual penalties associated with money management costs and investor behaviour – it’s a double-whammy for investors fraught with money inflows into most funds after good performance and money outflows from most funds after poor performance. This means “investor emotions plus fund industry promotions” signalling trouble for the retail investor.
On five ways to avoid financial devastation? (only two work)
- Select a very low-cost index fund that simply holds the stock market portfolio.
- Select funds with rock-bottom costs, minimal portfolio turnover, and no sales loads.
To paraphrase, don’t look for individual (stock) needles, buy the haystack (of stocks) and hold them for good. “Your index fund should not be your manager’s cash cow. It should be your own cash cow.”
Bogle: “Not a terrible idea, but not a world-changing one, either.” Smart-beta ETFs weight their portfolios by factors, not by the market capitalizations of its components like traditional index funds do. Bogle is skeptical of this approach since the goal is to create more profits for the money manager by gathering the assets of investors seeking a performance edge. He believes short-term investing strategies are rarely – if ever – optimal long-term strategies.
On what you and I should know:
- We must start to invest at the earliest possible moment, to gain the greatest long-term returns.
- That investing entails risks.
- Investing costs really matter.
- Taxes matter, and they too like investing costs, must be minimized.
- Beating the market may only work for the few.
As with all things related to the Vanguard Group, and their indexing mantra, Bogle beat the passive investing drum in consistent fashion throughout The Little Book of Common Sense Investing.
While I’m not ready to change my investing ways entirely (moving fully away from owning any dividend paying stocks) I have embraced the virtues of low-cost ETF investing more over time – and will continue to do so. I may or may not eventually become a completely indexed investor.
Investors who want to take more control over their portfolios would be well-served to read this book. Indexing is not the only way to invest but few books claim the virtues of this approach any better, with simple messages, stock market history, and tales of poor investor behaviour.
Have you read Bogle’s Little Book of Common Sense Investing? What’s your take on indexing using low-cost ETFs or mutual funds?