Book Review: The Little Book of Common Sense Investing by John Bogle
The Little Book of Common Sense Investing: The Only Way to Guarantee Your Fair Share of Stock Market Returns by John Bogle was one of my five personal finance books to read list for my 2017 personal finance goals. It is probably my favourite personal finance book so far that I have read this year. It was very easy to read and very well written and to the point. I haven’t read any other of John Bogle’s books, but I hear they are very good as well.
If you don’t know who John Bogle is, he is the founder of The Vanguard Group which has over $4 trillion in assets under management (he is basically the creator and inventor of the Index Fund). Vanguard is the largest provider of mutual funds and second largest provider of Exchange Traded Funds. He created a way for individual investors to invest in a low cost way in the stock market.
If that introduction to John Bogle wasn’t enough to make you want to read the book, I don’t know what will!
It was an easy read and the chapters are short and succinct. Each chapter touted the merits of low cost investing through index funds, and I liked that every chapter had a little boxed section titled “Don’t Take My Word for It” which quoted some other great investors, such as Warren Buffett. For example, he quotes Warren Buffett in the first chapter “for investors as a whole, returns decrease as motion increases.”
There are a few basic messages in the book, and these are backed with information and data that is easy to read.
The basic messages in The Little Book of Common Sense Investing include:
- The stock market is fickle- He mentions Benjamin Graham’s analogy of Mr. Market, and that there is a grim side to Mr. Market which includes market expectations, not actual business reality, which are earnings growth.
- Costs matter– The magic of compound interest is eroded when your costs are high. $10,000 over 50 years at 8% before cots grows to $469,000 whereas growth of $10,000 after 50 years at 5.5% after costs (with a reasonable 2.5% fee) is only $145,400. Therefore it is very important to keep your costs low.
- Don’t try to beat the market– One of my favourite quotes from the book is “Don’t look for the needle- buy the haystack”. Why try to beat the market when over time, the odds of beating the market are slim to none? Index investing is the way to go.
- Be wary of Exchange Traded Funds- Given that Exchange Traded Funds (ETFs) are traded on the market, he recommends being wary of them because they can be bought and sold easily. He recommends that they are bought and held for the long term and not for speculation. The more you trade the more costs you incur, which defeats the purpose of them passively tracking the index.
- If you do want to gamble, do it with a small portion of your portfolio– And by small portion, he recommends no more than five percent of your portfolio. He calls it the Funny Money portion of your portfolio.
- Keep your asset allocation true to yourself– He recommends keeping a percentage of your portfolio in fixed income, such as your age in bonds or your age subtracted by 10 in bonds to keep with safe asset allocation.
As mentioned, I really enjoyed The Little Book of Common Sense Investing. It was an easy read, and although I already ascribe to Index Investing, for those that aren’t so sure yet, this will definitely convince you to switch to the ‘other side’ (at least with 95% of your portfolio in the Serious Money Account). It wasn’t something that I already didn’t know (sort of like preaching to the converted already), but it was a good review nonetheless.
Readers, have you read The Little Book of Common Sense Investing? Have you read any of John Bogle’s other books? What did you think?