The Little Book Of Common Sense Investing | The Only Way To Guarantee Your Fair Share of Stock Market Returns by John C Bogle

May 30, 2022

Brief Summary

I've been lucky enough to work at Morningstar which is known for its fund and stock ratings. During my tenure there, I got an opportunity to hear John Bogle at one of the Morningstar Investment's Conference. Shortly after, he passed away. People who believe in Bogle are known as Bogleheads. I am now one of them! John C. Bogle is truly a legend and when you read his writings, you'll understand why. Meeting the average stock performance is hard, let alone beating the market. Beyond picking stocks, there is construction of the optimal portfolio, sizing, timing and all the uncontrollable variables that market presents including tax as a cost. When you add all of these things together, the effort you put in does not justify the outcome unless you are beating the market by many folds. Passive investing is still superior because it allows you to ignore the bells and whistles of the market which allows you to sleep peacefully at night. Accepting what market produces for you should be considered satisfactory. This book is a master class on how to think and invest for long-term especially in the traditional index funds. John C. Bogle wrote this book shortly before he passed away. He was an American hero and his legacy lives on through Vanguard (the leader in low cost index funds).

Big Ideas

Investing is simple, but not easy. Bogle, the creator of Vanguard which created the first index mutual fund in 1974 was lonely in the fight at first. But as time passed on, the idea caught on fire.
- Paul A Samuelson, Nobel laureate in economic sciences and professor at MIT once said: Bogle's reasoned percepts can enable a few millions of us savers to become in twenty years the envy of our suburban neighbors—while at the same time we have slept well in these eventful times.
- The record of an investor in the first index mutual fund: $15,000 invested in 1976 would be valued at $913,000 in 2016.
In the book, Bogle shares commentary provided by legendary investors and industry experts on the value of investing in low cost index funds. To my surprise, I was baffled, but not surprised on the spirit of investing in these funds. Even the great investors and market commentors such as Jim Cramer have bowed down to Bogle's wisdom.
- “It’s bad enough that you have to take market risk. Only a fool takes on the additional risk of doing yet more damage by failing to diversify properly with his or her nest egg. Avoid the problem-buy a well-run index fund and own the whole market.” — William Bernstein
Investing in low cost, broad index funds eliminates the risk of picking individual stocks, the risk of emphasizing certain market sectors, and the risk of manager selection.
Long-term investing serves you far better than short-term speculation, about the value of diversification, about the powerful role of investments costs, about the perils of relying on a fund's past performance and ignoring the principle of reversion (or regression) to the mean (RTM) in investing. Wall Street will never teach you this or want you to learn these things.
The average annual total return on stocks was 9.5 percent from 1900 to 2016. The investment return alone was 9.0 percent (actual returns made by corporate America)—4.4 percent from dividend yield and 4.6 percent from earnings growth. That difference of 0.5 percentage points per year was from speculative return. Each dollar initially invested in stocks in 1900 grew to $43,650 by 2015. Combining investment return and speculative return yields to total stock market returns.
- An astounding revelation on dividends. Excluding dividend income, an initial investment of $10,000 in the S&P 500 on January 1 1036, would have grown to more than $1.7 million as 2017 began. But dividends reinvested, that investment would've grown to some $59.1 million. This is the magic of free compounding—an astounding gap of $57.5 million.
  - Dividends per share on the 500 Index fell from $28.39 in 2008 to $22.41 in 2009, but reached a new high of $45.70 in 2016 (60% above the 2008 peak).
In the long run, stock returns depend almost entirely on the reality of the investment returns earned by corporations. It is economics that controls long-term equity returns; the impact of emotions, so dominant in the short term, dissolves.
The arithmetic of investment return is so basic: earnings and dividends generated by American businesses that are responsible for the returns in the long-term. While the price illusion in short-term loses touch. It is reality that rules in the long run.
- “One game is the real market, where giant publicly held companies compete. Where real companies spend real money to make and sell real products and services, and, if they play with skill, earn real profits and pay real dividends. This game also requires real strategy, determination, and expertise; real innovation and real foresight. Another game is expectations market. Here prices are not set by real things like sales margins or profits. In the short-term stock prices go up only when the expectations of investors rise, not necessarily when sales, margins, or profits rise.” — Roger Martin, dean of the Rotman School of Management of the University of Toronto.
Past returns do not foretell the future.
- “It is dangerous to apply to the future inductive arguments based on past experience, unless one can distinguish the broad reasons why past experience was what it was.” — John Maynard Keynes
Occam's razor: when there are multiple solutions to a problem, choose the simplest one. As applicable to investing as to the scientific world.
- Choose the simplest of all solutions—buy and hold a diversified, low-cost portfolio that tracks the stock market.
On average, an astonishing 90 percent of actively managed mutual funds underperformed their benchmark indexes over the preceding 15 years. Why? After subtracting all costs, an average investor is left with disappointing returns that does not meet the low-cost provider returns. Those costs are the relentless rules/factors of humble arithmetic. Following costs make the difference between investment success and failure:
- Investment expenses:
  - Management fees
  - Portfolio turnover
  - Brokerage commissions (ask/bid spread)
  - Sales loads
  - Advertising costs
  - Operating costs
  - Legal fees
- Inflation
- Counterproductive investor behavior
  - Bad timing (investing at peak or vice-versa)
  - Adverse fund selections
  - Factor investing
  - Tax liabilities on high turnover
- Taxes
  - Federal
  - State
  - Local
Wall Street is in the business of generating revenue for itself so as long as something is making money, they will sell you. And if a fund that has failed to meet its success, they will merge it into a larger fund eliminating historical track records or liquidate. Morgan Stanley is a great example of that.
As they say it, ETFs are a great substitution of traditional index funds. Then there are factor funds, smart beta and so on. Wall Street will continue to create alternative products that will want the piece of your pie by interrupting your compounding. But the best returns lie when you are not interrupting compounding. The more the managers and brokers take, the less the investors take.
Money flows into most funds after good performance, and goes out when bad performance follows. The dual penalty of faulty timing and adverse selection is very costly. These penalties add up. And don't forget inflation. The value of all those dollars take a huge tumble.
The beauty of index fund lies not only in its low expenses, but in its elimination of all those tempting fund choices that promises so much and deliver so little. Emotions need never enter the equation.
Past returns do not signal future returns. Last few decades have been exceptionally great in generating market returns, but the good times will not roll forever. Investors need to readjust their expectations for future returns.
- Reversion to the mean impacts mutual fund performance
- Yesterday's winners are tomorrow's losers.
Risk tolerance = risk capacity + risk willingness
Your index fund should not be your manager's cash cow. It should be your own cash cow.
Low cost also applies to bonds. Three types of bond funds:
- Short-term
- Intermediate
- Long-term

Quotes

The magic of compounding investment returns. The tyranny of compounding investment costs.
Before the deduction of the costs of investing, beating the stock market is a zero-sum game. After the deduction of the costs of investing beating the stock market is a loser's game.
Weak managements ultimately fall victim to the creative destruction that is the hallmark of competitive capitalism.
Simply buy a Standard & Poor's 500 Index fun or a total stock market index fund. Then, once you have bought your stocks, get out of the casino and stay out.
You don't need to participate in its expensive foolishness.
Get rid of all your Helpers. Then your family will again reap 100 percent of the pie that corporate America bakes for you.
When greed hold sway, very high P/Es are likely. When hope prevails, P/Es are moderate. When fear is in the saddle, P/Es are typically very low.
Stock returns are so volatile is largely because of the emotions of investing, reflected in those changing P/E ratios.
The stock market is a giant distraction to the business of investing.
It is a take told by an idiot, full of sound and fury, signifying nothing. — William Shakespeare
Owning the stock market over the long term is a winner's game, but attempting to beat the stock market is a loser's game.
We investors as a group get precisely what we don't pay for. If we pay nothing, we get everything.
Where returns are concerned, time is your friend. But whose costs are concerned, time is your enemy.
Fund performance comes and goes. Costs go on forever.
The average fund owner is designed not for precision, but for direction.
Inflamed by heady optimism and greed, and enticed by wiles of mutual fund marketers, investors poured their savings into equity funds at the bull market peak.
When counterproductive investor emotions are magnified by counterproductive fund industry promotions, little good is apt to result.
Fund investors have been chasing past performance since time immemorial, allowing their emotions, perhaps, even their greed, to overwhelm their reason.
Investor emotions plus fund industry promotions equals trouble.
The beauty of passive low-cost broad market index fund is if the managers take nothing, the investors receive everything (market's return).
Don't look for the needle, buy the haystack.
Whatever you decide, please don't ignore one of the least understood factors that shape mutual fund performance: reversion to the mean (RTM).
Picking winning funds based on past performance is hazardous duty.
The old saying that “past performance is no guide to the future” is not a piece of compliance jargon. It is the math. — Buttonwood
Buying funds based purely on their past performance is on the of the stupidest things an investor can do.
The temptation to chase past returns.
ETFs are a dream come true for entrepreneurs and brokers.
Simplicity beats complexity.
The greatest enemy of a good plan is the dream of a perfect plan. Stick to a good plan.
Investors should be satisfied with the reasonably good return obtainable from a defensive portfolio.