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

by John C. Bogle


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The best-selling investing "bible" offers new information, new insights, and new perspectives

The Little Book of Common Sense Investing is the classic guide to getting smart about the market. Legendary mutual fund pioneer John C. Bogle reveals his key to getting more out of investing: low-cost index funds. Bogle describes the simplest and most effective investment strategy for building wealth over the long term: buy and hold, at very low cost, a mutual fund that tracks a broad stock market Index such as the S&P 500.

While the stock market has tumbled and then soared since the first edition of Little Book of Common Sense was published in April 2007, Bogle’s investment principles have endured and served investors well. This tenth anniversary edition includes updated data and new information but maintains the same long-term perspective as in its predecessor.

Bogle has also added two new chapters designed to provide further guidance to investors: one on asset allocation, the other on retirement investing.

A portfolio focused on index funds is the only investment that effectively guarantees your fair share of stock market returns. This strategy is favored by Warren Buffett, who said this about Bogle: “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. For decades, Jack has urged investors to invest in ultra-low-cost index funds. . . . Today, however, he has the satisfaction of knowing that he helped millions of investors realize far better returns on their savings than they otherwise would have earned. He is a hero to them and to me.”

Bogle shows you how to make index investing work for you and help you achieve your financial goals, and finds support from some of the world's best financial minds: not only Warren Buffett, but Benjamin Graham, Paul Samuelson, Burton Malkiel, Yale’s David Swensen, Cliff Asness of AQR, and many others.

This new edition of The Little Book of Common Sense Investing offers you the same solid strategy as its predecessor for building your financial future.

  • Build a broadly diversified, low-cost portfolio without the risks of individual stocks, manager selection, or sector rotation.
  • Forget the fads and marketing hype, and focus on what works in the real world.
  • Understand that stock returns are generated by three sources (dividend yield, earnings growth, and change in market valuation) in order to establish rational expectations for stock returns over the coming decade.
  • Recognize that in the long run, business reality trumps market expectations.
  • Learn how to harness the magic of compounding returns while avoiding the tyranny of compounding costs.

While index investing allows you to sit back and let the market do the work for you, too many investors trade frantically, turning a winner’s game into a loser’s game. The Little Book of Common Sense Investing is a solid guidebook to your financial future.

Product Details

ISBN-13: 9780470102107
Publisher: Wiley
Publication date: 03/05/2007
Series: Little Books. Big Profits Series , #2
Pages: 240
Product dimensions: 5.30(w) x 7.10(h) x 1.10(d)

About the Author

JOHN C. BOGLE is founder and former chairman of the Vanguard Group of mutual funds and President of its Bogle Financial Markets Research Center. After creating Vanguard in 1974, he served as chairman and chief executive officer until 1996 and senior chairman until 2000. Bogle is the author of ten books, including Enough: True Measures of Money, Business, and Life, The Little Book of Common Sense Investing, and Clash of the Cultures: Investment vs. Speculation, all published by Wiley.

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."


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.

Table of Contents

Introduction     xi
A Parable     1
Rational Exuberance     9
Cast Your Lot with Business     23
How Most Investors Turn a Winner's Game into a Loser's Game     35
The Grand Illusion     49
Taxes Are Costs, Too     60
When the Good Times No Longer Roll     68
Selecting Long-Term Winners     78
Yesterday's Winners, Tomorrow's Losers     89
Seeking Advice to Select Funds?     100
Focus on the Lowest-Cost Funds     113
Profit from the Majesty of Simplicity     122
Bond Funds and Money Market Funds     138
Index Funds That Promise to Beat the Market     152
The Exchange Traded Fund     164
What Would Benjamin Graham Have Thought about Indexing?     176
"The Relentless Rules of Humble Arithmetic"     187
What Should I Do Now?     200
Acknowledgments     215

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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Little Book of Common Sense Investing 4.1 out of 5 based on 0 ratings. 18 reviews.
Guest More than 1 year ago
Good book, good buy. This book is relatively small but covers much ground in the promotion of index funds versus any other investment strategy for almost all investors. I understand the book is updated but perhaps slightly inferior to his previous Common Sense on Mutual Funds. This book seems filled almost to overflowing with historical evidence that denounces what appears to be mythical to Bogle: the Alpha. If you had to choose one book on investing then this is probably as good a choice as A Random Walk Down Wall Street although not nearly as comprehensive, it is a quicker read.
Anonymous 8 months ago
I’m still new to the topics of investing and indexing, but I think this book delves into the topics in an understandable way. Some parts are repetitive, but I still say it’s worth reading through the last chapter.
RamiFaour on LibraryThing More than 1 year ago
The message of this book are very clear, and John Bogle makes sure that you will understand it by repeating it too many times.The message is the following: the best investing strategy is to invest in the american companies, all of them, from all sectors, or more practically in an index fund(S&P500, etc), and to hold on through the roller coaster of the market.But Bogle offers more than this first step, the next step is making sure to MINIMIZE costs, in the form of taxes, and fees. Bogle shows, convincingly, how in the long term, expense ratios as little as 1% add up in the long run to make a significant difference on the returns of one's portfolio.One must always keep in mind the story presented in the beginning of the book, where a family is prospering by investing in real business, but is soon deranged by mediators who charge fees and promise returns, only to take up a big portion of the income that the whole family used to enjoy. This point is very important, maybe not for Bogle, but for any aspiring Bogle.
sbarrow57 on LibraryThing More than 1 year ago
This is the first book that I have read on index investing and I was a little disappointed. The author spells out his investment strategy of using index funds to cover the whole market very eloquently in the first couple of chapters. After that the little book of common sense investing does not seem so little as the later chapters drag on and just seem to constantly repeat what has already been stated.Also it is a bit too US centric for a a potential investor from the UK.
beatbox32 on LibraryThing More than 1 year ago
I'm 29-going-on-30 and wishing that I had absorbed the wisdom imparted in this book when I first signed up for a 401k. But here I am, seven years later, finally having a real understanding of where I should stash my retirement nest egg.The premise behind this book is simple - index funds have proven to be the wisest vehicle to throw your money in to achieve long-term profits. Bogle does an excellent job of explaining why this is, utilizing the "humble arithmetic" behind his thesis. For those who are like my old self and unsure of the best way to invest your retirement savings, look into low-cost index funds. And don't just throw your money in there...purchase this book and understand WHY you should.
rayski on LibraryThing More than 1 year ago
Index Funds sums it all up. A quick read, but leaves you wanting more. More like William Bernstein¿s `The Four Pillars of Investing¿ which is a superior read.
Jeremy McCaslin More than 1 year ago
Changd my life. One of the best books ever read.
Anonymous More than 1 year ago
This is a book to be read as one starts investing at any age. Read it early and have a track to run on that will lead to securing your retirement. Read it again later in you investment life and it will remind you to discount the hype of advertising. It is a book by the best that will focus your investment program and keep it focused. Crookedwood
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Anonymous More than 1 year ago
After reading paper copy, overall advice is great: don't pay others to manage your retirement savings.
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Investment_Reader More than 1 year ago
This is the best investment book ever written. All investment professionals should read this book, as should anyone with investments. John Bogle, the inventor of the index fund, has proven indexing beats every other option! A good companion to this book is, "The 401(k) Cookbook", which helps individuals implement Bogle's ideas in their own 401k account.
FredSmith More than 1 year ago
The Little Book of Common Sense Investing, is one of a series of Little Books. It is written in an informative, but easy to understand style. An excellent book for new stock traders.
Anonymous More than 1 year ago
The Little Book of Common Sense Investing is a great book. Bogle does a good job of explaining how and why investing isn't difficult. He offers advice on investing that allows those who might be concerned about the arcane ways of the "Street" a way to begin a journey aimed at a successful investing life.