Common-Sense Investing: The Only Way to Guarantee Your Fair Share of Stock Market Return.

By John Bogle

Common Sense Investing is the classic guide to getting smart about the market. Legendary mutual fund  pioneer John 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.

 

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.

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.

• Language: English
• Publisher: Peter Brain
• Release date: Mar 12, 2024
• ISBN: 9798224683024

Book preview

COMMON-SENSE INVESTING:

The Only Way to Guarantee Your Fair Share of Stock Market Return.

John Bogle

TABLE OF CONTENTS

Chapter 1: A Parable

The Got rocks household

Take Not My Word for It

Chapter 2: Reasonable Exultation

Gains for Shareholders Must Equal Gains for Business.

Investment Return Compared to Market Return

The double aspect of stock market yields.

The stock market is a major source of distraction for investors.

Take Not My Word for It

Chapter 3: Cast Your Share of the Business

Gain by Keeping Things Simple and Using Occam's Razor.

The stock market's returns have to match the total returns received by all investors in the market.

A warning and a caveat.

Chapter 4: How Most Investors Turn a Winner's Game into a Loser's Game.

The Unwavering Guide to Lowly Arithmetic

The unwavering principles of modest arithmetic.

The distinction between a successful and unsuccessful investment is made by costs.

Investors in funds should get a fair shake.

Chapter 5: Emphasis on the Lowest-Cost Resources

The investors make less money the more the managers take.

Investors get everything—the market's return—if the management do nothing.

Chapter 6: Dividends Are the Investor's (Best?)

Mutual Funds, however, reveal far too much about them.

Mutual fund managers place little emphasis on dividend income.

Earnings from actively managed equity funds are forfeited.

Chapter 7: The Magnificent Delusion

Whoa! Investors in mutual funds Rarely See The Returns Reported by Mutual Funds.

The double consequences of expenses and investor conduct.

Problems arise when fund industry advertisements combine with investor emotions.

Chapter 8: Taxes Are Expenses, Too

Never Give Uncle Sam More Money Than You Should.

Chapter 9: The Good Times Don't Roll Any More

Planning for Lower Future Returns in the Stock and Bond Markets Is Wise.

The current interest yield is the source of bond returns.

Five strategies to keep your finances safe. Just two are productive.

Chapter 10: Choosing Long-Term Successors

Invest in a haystack instead of a needle.

By the sword, one lives and dies.

Chapter 11: Going Back to the Average

Today's Losers, Today's Winners

Comprehensive fund industry data confirms the reversion to the mean (RTM).

Selecting winnings based on prior performance is a risky task.

Chapter 12: Looking for Help with Fund Selection?

Before you jump, look.

Helping investors can be greatly aided by registered investment advisers (RIAs).

Do assistants bring value or detract from it?

The Focus Twenty fund and the Internet Strategies fund are two poor concepts.

Chapter 13: Take Advantage of the Magnificence of Simplicity and Parsimony

Invest in Conventional Low-Cost Index Funds That Monitor the Stock Market.

Fund for Passive Index

Regardless of market efficiency, indexing remains effective.

Chapter 14: Funds for Bonds

Where the unwavering principles of humble arithmetic also hold sway.

The significance of expenses in determining bond fund returns.

Chapter 15: The Exchange-Traded Fund (ETF)

A Vendor for the Cause?

For 19 of the top 20 performing ETFs, investor returns were less than ETF returns.

The business's interests versus the clients' interests.

Chapter 16: Index Funds That Claim to Outperform the Market the New Standard?

ETF methods that are passive and intended to surpass stock market returns.

Recent occurrences support doubts on the efficacy of smart beta.

Chapter 17: What Are The Thoughts of Benjamin Graham Regarding Indexing?

Mr. Buffett Verifies Mr. Graham's Support for the Index Fund.

Mr. Buffett said these things to me face-to-face during an Omaha dinner in

Chapter 18: Allocation of Assets I: Stocks and Bonds

The Moment You Start Investing. As You Gather Resources. Upon Your Retirement.

Ability to take risk, willingness to take risk.

Chapter 19: Asset Allocation

Retirement Investing, and Funds That Set Your Asset Allocation in Advance.

Retirement Accounts

Chapter 20: Investment Advice That Meets the Test of Time

Channeling Benjamin Franklin

Chapter 1: A Parable

The Got rocks household

Even before you consider index funds, which are essentially mutual funds that just purchase and hold shares of almost every stock in the U.S. stock market, you should be aware of how the stock market functions. This corny tale, which I adapted from a story Warren Buffett, the chairman of Berkshire Hathaway, Inc., gave in the company's 2005 Annual Report, can help to explain the absurdity and counterproductivity of our enormous and intricate financial market system.

Once upon a time.....A wealthy family known as the Got rocks held 100% of all stocks in the United States. Over the course of many generations, the Got rock family expanded to include thousands of brothers, sisters, aunts, uncles, and cousins. Every year, they enjoyed the fruits of their investment: all the dividends paid out and the growth in revenues that those thousands of companies produced.1 Every family member gained wealth at the same rate, and everything coexisted. Over the years, their investment multiplied, generating great wealth. The Gotrocks were engaged in a game of winning.

However, a few gregarious Helpers show up later and convince some of the smart Gotrocks cousins that they can make more money than their relatives. These Helpers persuade the cousins to purchase shares of other companies from them in exchange for selling their stakes in some of the companies to other family members. As brokers, the Helpers manage the transactions and get paid commissions for their work. This results in a reorganization of ownership among the family members. To their amazement, though, the family's fortune starts to increase more slowly. Why? The Helpers now consume a portion of the investment return, and the family's portion of the generous pie that the US industry bakes every year—all of the profits and dividends paid and reinvested in the businesses—100 percent initially, begins to diminish because the Helpers now consume a portion of the return.

To make matters worse, some family members are now paying capital gains taxes on top of the taxes they have previously paid on their dividends.

Their back-and-forth stock trading results in capital gains taxes, which further reduces the family's overall wealth.

The astute cousins soon see that their strategy has actually slowed the rate at which the family's wealth is increasing. They admit that their attempt at stock selection was unsuccessful and come to the conclusion that they would be better off getting professional help in order to choose the appropriate stocks for themselves. Thus, they bring on more Helpers—stock-picking specialists!—to acquire a benefit. These financial advisors bill for their services. Thus, a year later, when the family evaluates its riches, it discovers that its piece of the pie has shrunk even further.

To make matters worse, the new managers feel forced to trade the family's stocks at feverishly high volumes in order to earn their keep. This drives up the tax bill in addition to broker commissions paid to the first group of Helpers. The family's previous 100% cut of the profits and dividends pie has now been significantly reduced.

The astute cousins explain, 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. How should we proceed? Despite their two previous setbacks, they choose to bring on additional Helpers. They continue to hire the top financial planners and investment advisors they can locate to counsel them on how to choose the greatest managers, who will then undoubtedly choose the best stocks. Naturally, the consultants assure them that they can handle the work. The new Helpers reassure the cousins, Just pay us a fee for our services, and all will be well." Unfortunately, with those additional costs, the family's part of the pie tumbles once more.

Eliminate all of your assisters. After that, your family will once more receive a whole piece of the pie that corporate America bakes for you.

Finally alarmed, the family gathers and evaluates what has transpired since some of them started attempting to outwit one another. They question, How come our original 100 percent piece of the pie, which was made up of all those earnings and dividends every year, has shrunk to just 60 percent? 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," gently replies their wisest member, an elderly uncle.

Return to the beginning, and do so right away. Get rid of every broker you have. Get rid of all of your financial advisors. Get rid of every consultant you have. Then, year after year, our family will once more receive 100% of whatever pie corporate America bakes for us.

They took the old uncle's sensible counsel to heart, going back to their first passive but effective plan, keeping all of the corporate America stocks, and doing nothing.

That's precisely what an index fund accomplishes.

......and the Gotrocks Family Continued to Live Happy Ever After

Adding a fourth law to Sir Isaac Newton's three laws of motion, the legendary Warren Buffett summarizes his story's lesson as follows: returns generally decline as motion rises for investors.

Even while that cryptic statement is accurate, I would also add that the tale illustrates the serious conflict of interest that exists between stock and bond investors and those who work in the financial industry. For those in the company, convincing their clients to don't just stand there is the path to wealth. Do something. However, the overall path to riches for their clientele is to take the opposing maxim, which is, Don't do something. The only way to stop yourself from playing the loser's game of trying to beat the market is to just stand there.

It's only a matter of time until customers realize this when a firm is run in a manner that clearly contradicts their interests overall. Then something changes, and it's this transformation that's fueling the current financial system revolution.

The Gotrocks story's lesson is that successful investment is about owning companies and benefiting from the enormous rewards offered by the dividends and earnings growth of our country's—and, for that matter, the world's—corporations. In other words, the more invested our shareholders are, the more they pay in taxes and financial intermediary fees, and the less net return they take home as our company owners. The gains that investors receive increase in proportion to the costs that they all bear. Therefore, the astute investor will minimize the costs of financial intermediation to the barest minimum in order to reap the long-term profits that firms generate. That's what common sense indicates. That's the basic idea of indexing. And that's the main takeaway from this book.

Take Not My Word for It

Hear from Jack R. Meyer , the former Harvard Management president.

Company, the extraordinarily prosperous magician responsible for tripling the $8 billion Harvard University endowment money to $27 billion. In an interview with BusinessWeek in 2004, he stated as follows: The investment business is a giant scam. The majority of people are mistaken when they believe they can discover managers who can perform better. I'll estimate that between 85 and 90 percent of managers fall short of their goals. You can tell that managers are generally erasing value since they have fees and transaction costs.

Mr. Meyer said, Yes, when asked if private investors could learn anything from what Harvard does. Get diversified first. Create a portfolio that includes a wide range of asset classes. Secondly, you should charge minimal fees. This implies sticking with low-cost index funds instead of the most popular but pricy funds. Finally, make long-term investments. All investors need to do is maintain index funds to minimize their costs and taxes. Without a question.

Less controversially, Princeton University professor Burton G. Malkiel, author of A Random Walk Down Wall Street, states the following: [Annual] rates of return from index funds consistently surpass those from active managers by nearly two percentage points. Because active management as a whole is unable to provide gross returns that surpass the market as a whole, they must, on average, lag the indexes by the amount of these transaction and expense expenses.

Experience unequivocally demonstrates that investors in index funds are likely to outperform fund managers, whose high advisory costs and significant portfolio turnover typically lower investment yields.......The index fund is a practical, workable way to get the market return rate with very little work and money involved.

Chapter 2: Reasonable Exultation

Gains for Shareholders Must Equal Gains for Business.

The essential truth of investment is brought home by THAT WONDERFUL PARABLE about the Gotrocks family in Chapter 1: The most that owners in aggregate can earn between now and Judgement Day is what their businesses in aggregate earn, to quote Warren Buffett. Please pay close attention to Mr. Buffett's speech as he uses Berkshire Hathaway, the publicly traded company he has led for 46 years, to illustrate his point.

A small group of investors—either sellers or buyers—benefit disproportionately when the stock momentarily outperforms the company at the expense of other investors.......The total profits received by Berkshire shareholders over time must unavoidably equal the company's commercial profits.

"Over time, the total profits earned by.....The company's stockholders are obligated to match its business gains.

How frequently do investors forget that timeless lesson? But the record is unambiguous. If only we would take the time to study history, we would find a striking, if necessary, correlation between the stock market's cumulative returns and the cumulative long-term returns generated