The Little Book of Common Sense Investing: The Only Way to Guarantee Your Fair Share of Stock Market Returns

The Little Book of Common Sense Investing: The Only Way to Guarantee Your Fair Share of Stock Market Returns

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by John C. Bogle
     
 

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Investing is all about common sense. Owning a diversified portfolio of stocks and holding it for the long term is a winner's game. Trying to beat the stock market is theoretically a zero-sum game (for every winner, there must be a loser), and after the substantial costs of investing are deducted, it becomes a loser's game. Common sense tells us—and history… See more details below

Overview

Investing is all about common sense. Owning a diversified portfolio of stocks and holding it for the long term is a winner's game. Trying to beat the stock market is theoretically a zero-sum game (for every winner, there must be a loser), and after the substantial costs of investing are deducted, it becomes a loser's game. Common sense tells us—and history confirms—that the simplest and most efficient investment strategy is to buy and hold all of the nation's publicly held businesses at very low cost. The classic index fund that owns this market portfolio is the only investment that guarantees you with your fair share of stock market returns.

To learn how to make index investing work for you, there's no better mentor than legendary mutual fund industry veteran John C. Bogle. Over the course of his long career, Bogle—founder of the Vanguard Group and creator of the world's first index mutual fund—has relied primarily on index investing to help Vanguard's clients build substantial wealth. Now, with The Little Book of Common Sense Investing, he wants to help you do the same.

Filled with in-depth insights and practical advice, The Little Book of Common Sense Investing will show you how to incorporate this proven investment strategy into your portfolio. It will also change the very way you think about investing. Successful investing is not easy—it requires discipline and patience. But it is simple, for it's all about common sense.

With The Little Book of Common Sense Investing as your guide, you'll discover how to make investing a winner's game:

  • Why business reality—dividend yields and earnings growth—is more important than market expectations
  • How to overcome the powerful impact of investment costs, taxes, and inflation
  • How the magic of compounding returns is overwhelmed by the tyranny of compounding costs
  • What expert investors and brilliant academics—from Warren Buffett and Benjamin Graham to Paul Samuelson and Burton Malkiel—have to say about index investing
  • And much more

You'll also find warnings about investment fads and fashions, including the recent stampede into exchange traded funds and the rise of indexing gimmickry. The real formula for investment success is to own the entire market, while significantly minimizing the costs of financial intermediation. That's what index investing is all about. And that's what this book is all about.

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Editorial Reviews

Library Journal

Bogle (The Battle for the Soul of Capitalism) provides exemplary advice for investors interested in index funds. His solid, logical information is targeted at investors at all levels, and he deflates the myth of the superiority of mutual funds by explaining how common sense can help the average investor successfully manage low-cost index funds. As Bogle explains, owning a diversified portfolio of stocks for the long term is a winner's game, while trying to beat the stock market is a zero-sum game; after the substantial costs of investing are deducted, it becomes a loser's game. The material explains why dividend yields and earnings growth are more important than market expectations, how to overcome the powerful impact of investment costs, taxes, and inflation, and what expert investors like Warren Buffett say about index investing. The solid narration by Thom Pinto keeps listener interest on Bogle's latest approach to long-term investing, which, while offering nothing extraordinarily new in the overly saturated financial advice genre, nicely represents more than 20 years of successful investment advice from a leader in this field. Highly recommended for university libraries supporting a business curriculum and larger public libraries.
—Dale Farris

From the Publisher
"excellent advice in a concise and accessible manner." (The Wall Street Journal, April 10, 2007)

"It's hard to argue with the eloquent logic of John C. Bogle's latest ode to index funds…Bogle's 'Little Book' offers much exemplary advice." (Bloomberg News, April 2007)

Among monetary gurus and wise men, John Bogle is a singular case. As the founder of the highly regarded Vanguard Group, he is revered for the company's commitment to providing value to its clients as well as profits to its investors. He even has his own group of fans, called "Bogleheads," who cling to every utterance and pronouncement from the great man.

In this latest entry in the Little Book series, Bogle's gentle prose contains idiot-proof advice for investors at all levels. He punctures the myth of the superiority of mutual funds and instead declares that by using a bit of common sense, low-cost index funds are the way to go for most modest stock investors. He's also wary of the ways of Wall Street and cautions investors to steer clear of its institutional con men and cautions against excessive fees and taxes that invariably eat up profits.
It's not very glamorous or exciting advice, but that's also his point: Slow and steady wins the race. (Miami Herald, April 9, 2007)

"genuinely provides investors with the ideal strategy for making the most of stock-market investing" (Motley Fool's UK website, March 8, 2007)

"It's an easy read that will, I suspect, quickly join Burton Malkiel's A Random Walk Down Wall Streetand Charles Ellis's Winning the Loser's Gameas one of the indexing crowd's favorite books."—Jonathan Clements (Wall Street Journal)

"It's hard to argue with the eloquent logic of John C. Bogle's latest ode to index funds." (Bloomberg Terminal, March 8, 2007).

"provides an opportunity to reflect on a remarkable career and legacy." (Financial Times, 19th March 2007)

"…it is John Bogle's hymn to index-tracking investment, and a fascinating read it is too." (Daily Telegraph, March 2007)

"Those who doubt my reasoning should read the Little Book of Common Sense Investing by John Bogle." (FT Adviser, 24th April 2007)

"…particularly interesting…goes some way towards discrediting the stockpicking virtues taught to me in my time as a financial journalist." (Fund Strategy, 7th May 2007)

"…wittily written, pocket-sized guide…If you want to learn how to avoid the unpredictabilities of the stock market and the fees of middle men, then this book is well worth a read." (Pensions Age, May 2007)

" ... For the individual investor, it presents a solid game plan for growing funds over the long haul." (Directorship, July 2007)

"... read Bogle's new Little Book of Common Sense Investingand you'll see how easy it is to beat the Alpha Hunters at their own game!" (MarketWatch, July 2007)

‘The one big thing that Bogle knows -- and explains so well in this slender volume -- is that buying and holding a broad benchmark of stocks while keeping fees to a minimum leads to higher long-term returns than constantly trading in a vain attempt to beat the market. Common sense? Yes. But radical too, as the entire investing establishment is designed to get investors to do the exact opposite.” (CNNMoney)

"Business books are often written by show-offs who want you to know all about their knowledge of the Greek tragedies and dark-coloured birds. So it was nice to get hold of the simply written Little Book of Common Sense Investing…Its author, John Bogle, in no simpleton. He built Vanguard into a huge fund manager...He is synonymous with index funds in the US. Vanguard's S&P 500 tracker is by far the world's largest mutual fund."—Stephen Cranston, Investor's Notebook (Jan 23, 2013)

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Product Details

ISBN-13:
9780470893333
Publisher:
Wiley
Publication date:
05/21/2010
Series:
Little Books. Big Profits , #2
Sold by:
Barnes & Noble
Format:
NOOK Book
Pages:
240
Sales rank:
45,239
File size:
1 MB

Related Subjects

Read an Excerpt

The Little Book of Common Sense


By John Bogle

John Wiley & Sons

Copyright © 2007 John Bogle
All right reserved.

ISBN: 978-0-470-10210-7


Chapter One

A Parable

The Gotrocks Family

Even before you think about "index funds"-in their most basic form, mutual funds that simply buy all the stocks in the U.S. stock market and hold them forever-you must understand how the stock market actually works. Perhaps this homely parable-my version of a story told by Warren Buffett, chairman of Berkshire Hathaway Inc., in the firm's 2005 Annual Report-will clarify the foolishness and counterproductivity of our vast and complex financial market system.

Once upon a Time ...

A wealthy family named the Gotrocks, grown over the generations to include thousands of brothers, sisters, aunts, uncles, and cousins, owned 100 percent of every stock in the United States. Each year, they reaped the rewards of investing: all the earnings growth that those thousands of corporations generated and all the dividends that they distributed. Each family member grew wealthier at the same pace, and all was harmonious. Their investment had compounded over the decades, creating enormous wealth, because the Gotrocks family was playing a winner's game.

But after a while, a few fast-talking Helpers arrive on the scene, and they persuade some "smart" Gotrocks cousins thatthey can earn a larger share than the other relatives. These Helpers convince the cousins to sell some of their shares in the companies to other family members and to buy some shares of others from them in return. The Helpers handle the transactions, and as brokers, they receive commissions for their services. The ownership is thus rearranged among the family members.

To their surprise, however, the family wealth begins to grow at a slower pace. Why? Because some of the return is now consumed by the Helpers, and the family's share of the generous pie that U.S. industry bakes each year-all those dividends paid, all those earnings reinvested in the business-100 percent at the outset, starts to decline, simply because some of the return is now consumed by the Helpers.

To make matters worse, while the family had always paid taxes on their dividends, some of the members are now also paying taxes on the capital gains they realize from their stock-swapping back and forth, further diminishing the family's total wealth.

The smart cousins quickly realize that their plan has actually diminished the rate of growth in the family's wealth. They recognize that their foray into stock-picking has been a failure and conclude that they need professional assistance, the better to pick the right stocks for themselves. So they hire stock-picking experts-more Helpers!-to gain an advantage. These money managers charge a fee for their services. So when the family appraises its wealth a year later, it finds that its share of the pie has diminished even further.

To make matters still worse, the new managers feel compelled to earn their keep by trading the family's stocks at feverish levels of activity, not only increasing the brokerage commissions paid to the first set of Helpers, but running up the tax bill as well. Now the family's earlier 100 percent share of the dividend and earnings pie is further diminished.

"Well, we failed to pick good stocks for ourselves, and when that didn't work, we also failed to pick managers who could do so," the smart cousins say. "What shall we do?" Undeterred by their two previous failures, they decide to hire still more Helpers. They retain the best investment consultants and financial planners they can find to advise them on how to select the right managers, who will then surely pick the right stocks. The consultants, of course, tell them they can do exactly that. "Just pay us a fee for our services," the new Helpers assure the cousins, "and all will be well." Alas, the family's share of the pie tumbles once again.

Get rid of all your Helpers. Then our family will again reap 100 percent of the pie that Corporate America bakes for us.

Alarmed at last, the family sits down together and takes stock of the events that have transpired since some of them began to try to outsmart the others. "How is it," they ask, "that our original 100 percent share of the pie-made up each year of all those dividends and earnings-has dwindled to just 60 percent?" Their wisest member, a sage old uncle, softly responds: "All that money you've paid to those Helpers and all those unnecessary extra taxes you're paying come directly out of our family's total earnings and dividends. Go back to square one, and do so immediately. Get rid of all your brokers. Get rid of all your money managers. Get rid of all your consultants. Then our family will again reap 100 percent of however large a pie that corporate America bakes for us, year after year."

They followed the old uncle's wise advice, returning to their original passive but productive strategy, holding all the stocks of corporate America, and standing pat. That is exactly what an index fund does.

... and the Gotrocks Family Lived Happily Ever After

Adding a fourth law to Sir Isaac Newton's three laws of motion, the inimitable Warren Buffett puts the moral of the story this way: For investors as a whole, returns decrease as motion increases.

Accurate as that cryptic statement is, I would add that the parable reflects the profound conflict of interest between those who work in the investment business and those who invest in stocks and bonds. The way to wealth for those in the business is to persuade their clients, "Don't just stand there. Do something." But the way to wealth for their clients in the aggregate is to follow the opposite maxim: "Don't do something. Just stand there." For that is the only way to avoid playing the loser's game of trying to beat the market. When any business is conducted in a way that directly defies the interests of its clients in the aggregate, it is only a matter of time until change comes.

The moral of the story, then, is that successful investing is about owning businesses and reaping the huge rewards provided by the dividends and earnings growth of our nation's-and, for that matter, the world's-corporations. The higher the level of their investment activity, the greater the cost of financial intermediation and taxes, the less the net return that the business owners as a group receive. The lower the costs that investors as a group incur, the higher rewards that they reap. So to realize the winning returns generated by businesses over the long term, the intelligent investor will minimize to the bare bones the costs of financial intermediation. That's what common sense tells us. That's what indexing is all about. And that's what this book is all about.

Don't Take My Word for It

Listen to Jack R. Meyer, former president of Harvard Management Company, the remarkably successful wizard who tripled the Harvard endowment fund from $8 billion to $27 billion. Here's what he had to say in a 2004 Business Week interview: "The investment business is a giant scam. Most people think they can find managers who can outperform, but most people are wrong. I will say that 85 to 90 percent of managers fail to match their benchmarks. Because managers have fees and incur transaction costs, you know that in the aggregate they are deleting value." When asked if private investors can draw any lessons from what Harvard does, Mr. Meyer responded, "Yes. First, get diversified. Come up with a portfolio that covers a lot of asset classes. Second, you want to keep your fees low. That means avoiding the most hyped but expensive funds, in favor of low-cost index funds. And finally, invest for the long term. [Investors] should simply have index funds to keep their fees low and their taxes down. No doubt about it."

In terms that are a bit more academic, Princeton professor Burton G. Malkiel, author of A Random Walk Down Wall Street, expresses these views: "Index funds have regularly produced rates of return exceeding those of active managers by close to 2 percentage points. Active management as a whole cannot achieve gross returns exceeding the market as a while and therefore they must, on average, underperform the indexes by the amount of these expense and transaction costs disadvantages.

"Experience conclusively shows that index-fund buyers are likely to obtain results exceeding those of the typical fund manager, whose large advisory fees and substantial portfolio turnover tend to reduce investment yields. Many people will find the guarantee of playing the stock-market game at par every round a very attractive one. The index fund is a sensible, serviceable method for obtaining the market's rate of return with absolutely no effort and minimal expense."

(Continues...)



Excerpted from The Little Book of Common Sense by John Bogle Copyright © 2007 by John Bogle. Excerpted by permission.
All rights reserved. No part of this excerpt may be reproduced or reprinted without permission in writing from the publisher.
Excerpts are provided by Dial-A-Book Inc. solely for the personal use of visitors to this web site.

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What People are saying about this

From the Publisher
"excellent advice in a concise and accessible manner." (The Wall Street Journal, April 10, 2007)

"It's hard to argue with the eloquent logic of John C. Bogle's latest ode to index funds…Bogle's 'Little Book' offers much exemplary advice." (Bloomberg News, April 2007)

Among monetary gurus and wise men, John Bogle is a singular case. As the founder of the highly regarded Vanguard Group, he is revered for the company's commitment to providing value to its clients as well as profits to its investors. He even has his own group of fans, called "Bogleheads," who cling to every utterance and pronouncement from the great man.

In this latest entry in the Little Book series, Bogle's gentle prose contains idiot-proof advice for investors at all levels. He punctures the myth of the superiority of mutual funds and instead declares that by using a bit of common sense, low-cost index funds are the way to go for most modest stock investors. He's also wary of the ways of Wall Street and cautions investors to steer clear of its institutional con men and cautions against excessive fees and taxes that invariably eat up profits.
It's not very glamorous or exciting advice, but that's also his point: Slow and steady wins the race. (Miami Herald, April 9, 2007)

"genuinely provides investors with the ideal strategy for making the most of stock-market investing" (Motley Fool's UK website, March 8, 2007)

"It's an easy read that will, I suspect, quickly join Burton Malkiel's A Random Walk Down Wall Streetand Charles Ellis's Winning the Loser's Gameas one of the indexing crowd's favorite books."—Jonathan Clements (Wall Street Journal)

"It's hard to argue with the eloquent logic of John C. Bogle's latest ode to index funds." (Bloomberg Terminal, March 8, 2007).

"provides an opportunity to reflect on a remarkable career and legacy." (Financial Times, 19th March 2007)

"…it is John Bogle's hymn to index-tracking investment, and a fascinating read it is too." (Daily Telegraph, March 2007)

"Those who doubt my reasoning should read the Little Book of Common Sense Investing by John Bogle." (FT Adviser, 24th April 2007)

"…particularly interesting…goes some way towards discrediting the stockpicking virtues taught to me in my time as a financial journalist." (Fund Strategy, 7th May 2007)

"…wittily written, pocket-sized guide…If you want to learn how to avoid the unpredictabilities of the stock market and the fees of middle men, then this book is well worth a read." (Pensions Age, May 2007)

" ... For the individual investor, it presents a solid game plan for growing funds over the long haul." (Directorship, July 2007)

"... read Bogle's new Little Book of Common Sense Investingand you'll see how easy it is to beat the Alpha Hunters at their own game!" (MarketWatch, July 2007)

‘The one big thing that Bogle knows — and explains so well in this slender volume — is that buying and holding a broad benchmark of stocks while keeping fees to a minimum leads to higher long-term returns than constantly trading in a vain attempt to beat the market. Common sense? Yes. But radical too, as the entire investing establishment is designed to get investors to do the exact opposite.” (CNNMoney)

"Business books are often written by show-offs who want you to know all about their knowledge of the Greek tragedies and dark-coloured birds. So it was nice to get hold of the simply written Little Book of Common Sense Investing…Its author, John Bogle, in no simpleton. He built Vanguard into a huge fund manager...He is synonymous with index funds in the US. Vanguard's S&P 500 tracker is by far the world's largest mutual fund."—Stephen Cranston, Investor's Notebook (Jan 23, 2013)

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