The only money book you need to be a great investor

SPEED READER

Book: The Little Book of Common Sense Investing: The Only Way to Guarantee your Fair Share of Stock Market Returns (10th-anniversary edition, updated and revised)

Author: John C. Bogle

Publisher: John Wiley & Sons, Inc. Hoboken, NJ

Price: $14.01 (Hardcover) $9.65 (Kindle)

WHO IT’S FOR: People who want a simple investment plan

MORE SPECIFICALLY: Any individual investor who wants a great low-cost strategy that will grow and protect their portfolio for life

DOES IT BUST ANY MYTHS? Yes, that investing right has to be complicated (it doesn’t). He explains why speculation in investing in hot stocks doesn’t work and why how a business is doing (i.e. dividends plus earnings growth) is most important when building an investment portfolio.

SURELY ACTIVE MANAGERS CAN BEAT ANY COMMON INVESTOR’s RETURNS. Well, no. Bogle explains how less than 1% of all mutual funds were able to beat the market consistently over the past half-century. The reason? Various costs (including sales charges, advertising fees, tax implications, etc.) poor market timing, as well as an investor’s difficulty in choosing the right mutual fund from the thousands available (past performance is no indication of current performance), makes it virtually impossible to “pick a winner.”

SO WHAT’S THE COMMON SENSE CONCLUSION? Index funds are the key to building a great portfolio. They provide the diversified return of the entire market with razor-thin investment fees as well as minimal time and effort.

WHY WE LIKE IT Since the book’s first publication in 2007, Bogle’s investment principles have endured and served investors well. Bogle writes clearly and is a convincing writer. Diagrams and illustrations throughout show the returns of various mutual funds versus index funds. He also compares what your original investment would like after a certain time period based on how it was invested. Plus, he often quotes very well- respected investors and professors to support his original points, including not only Warren Buffett, whose considered the world’s greatest investor, but also Burton Malkiel, and Benjamin Graham.

ONE BEEF WITH IT: Bogle’s own product is the Vanguard funds and he uses these in almost all examples, but because Bogle is the father of index investing, I think we can cut him some slack here. Vanguard isn’t the only low-fee option out there, but they are leaders for good reason.

CUTTING TO THE CHASE: And while, as Bogle says, this is all common sense, it’s good to remind yourself of the reasons why you should stay away from actively managed mutual funds. As Bogle says, we’re often blinded by flashy advertisements and hot market sectors that promise huge returns. This book is a good reality check for the average individual investor.

EXTRA INFO? Yes, Bogle has added two new chapters in the latest edition—one on asset allocation and one on retirement investing. This edition includes updated data and new information but maintains the same long-term perspective as its predecessor. Two new chapters have been added on the topic of asset allocation and retirement investing.

ACTION ITEM: Bogle’s simple advice is this: build a diversified, low-cost portfolio without the risks of individual stocks or manager selection. Forget the fads and hype. Understand that stock returns are generated by three sources—dividend yield, earnings growth and change in market valuation. In the long run, business reality trumps market expectations.

KEY TAKEAWAY: “Learn to harness the magic of compounding returns while avoiding the tyranny of compounding costs. Index investing allows you to sit back and let the market work for you. Don’t turn your investments into a winner’s game and loser’s game.”

Book Excerpt

Introduction: Don’t Allow a Winner’s Game to Become a Loser’s Game

Successful investing is all about common sense. As Warren Buffett, the Oracle of Omaha has said, it is simple, but it is not easy. Simple arithmetic suggests, and history confirms, that the winning strategy for investing in stocks is to own all the nation’s publicly held businesses at very low cost. By doing so you are guaranteed to capture almost the entire return that these businesses generate in the form of dividends and earnings growth.

The best way to implement this strategy is indeed simple: Buy a fund that holds this all-market portfolio and hold it forever. Such a fund is called an index fund. The index fund is simply a basked (portfolio) that holds many, many eggs (stocks) designed to mimic the overall performance of the U.S. stock market (or any financial market or market sector). The traditional index fund (TIF), by definition, basically represents the entire stock market basket, not just a few scattered eggs. It eliminates the risk of picking individual stocks, the risk of emphasizing certain market sectors, and the risk of manager selection. Only stock market risk remains. (The risk is quite large enough, thank you!). Index funds make up for their lack of short-term excitement by their truly exciting long-term productivity. The TIF is designed to be held for a lifetime.

“The index fund eliminates the risk of individual stocks, market sectors, and manager selection. Only stock market risk remains.”

This is much more than a book about index funds. It is a book that is determined to change the very way that you think about investing. It is a book about why long-term investing serves you far better than short-term speculation; about the value of diversification; about the powerful role of investment costs; about the perils of relying a fund’s past performance and ignoring the principle of reversion (or regression) to the mean (RTM) in investing; and about how financial markets work.

When you understand how our financial markets actually work, you will see that the index fund is indeed the only investment that essentially guarantees that you will capture your fair share of the returns that business earns. Thanks to the miracle of compounding, the accumulations of wealth that are generated by those returns over the years have been little short of fantastic.

The Traditional Index Fund

I’m speaking here about the traditional index fund. The TIF is broadly diversified, holding all (or almost all) of its share of the $26 trillion capitalizations of the U.S. stock market in early 2017. It operates with minimal expenses and with no advisory fees, with tiny portfolio turnover, and with high tax efficiency. That traditional index fund—the first one tracked the returns of the Standard & Poor’s 500 Index*—simply owns shares of the dominant firms in corporate America, buying an interest in each stock in the stock market in proportion to its market capitulation, and then holding it forever.

*Standard & Poor’s 500 Index—simply owns shares of the dominant firms in corporate America, buying an interest in each stock in the stock market in proportion to its market capitalization, and then holding it forever.

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