The Little Book of Common Sense Investing. Bogle John C.
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farfetched for me to hope that any single book could ignite the spark of a revolution in investing. New ideas that fly in the face of the conventional wisdom of the day are always greeted with doubt and scorn, even fear. Indeed, 240 years ago, the same challenge was faced by Thomas Paine, whose 1776 tract Common Sense helped spark the American Revolution. Here is what Tom Paine wrote:
Perhaps the sentiments contained in the following pages are not yet sufficiently fashionable to procure them general favor; a long habit of not thinking a thing wrong, gives it a superficial appearance of being right, and raises at first a formidable outcry in defense of custom. But the tumult soon subsides. Time makes more converts than reason… I offer nothing more than simple facts, plain arguments, and common sense.
As we now know, Thomas Paine’s powerful and articulate arguments carried the day. The American Revolution led to our Constitution, which to this day defines the responsibilities of our government and our citizens, the very fabric of our society.
Similarly, I believe that in the coming era, my own simple facts, plain arguments, and common sense will carry the day for investors. The Index Revolution will help us build a new and more efficient investment system for our nation, a system in which serving investors is its highest priority.
Some may suggest that, as the creator both of Vanguard in 1974 and of the world’s first index mutual fund in 1975, I have a vested interest in persuading you of my views. Of course I do! But not because it enriches me. It doesn’t earn me a penny. Rather, I want to persuade you because those two rocks on which Vanguard was founded all those years ago – our truly mutual, fund-shareholder-owned structure and our index fund strategy – will enrich you over the long term.
In the early years of indexing, my voice was a lonely one. But there were a few other thoughtful and respected believers whose ideas inspired me to carry on my mission. Today, many of our wisest and most successful investors endorse the index fund concept; among academics, the acceptance is close to universal. But don’t take my word for it. Listen to these independent experts who have no ax to grind except for the truth about investing. You’ll hear from some of them at the end of each chapter.
Listen, for example, to this endorsement by the late Paul A. Samuelson, Nobel laureate in economic sciences and professor of economics at the Massachusetts Institute of Technology, to whose memory this book is dedicated: “Bogle’s reasoned precepts can enable a few million 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.”
It will take a long time to fix our financial system. But the glacial pace of that change should not prevent you from looking after your own self-interest. You don’t need to participate in its expensive foolishness. If you choose to play the winner’s game of owning shares of businesses, and to refrain from playing the loser’s game of trying to beat the market, you can begin the task simply by using your own common sense, understanding the system, and eliminating substantially all of its excessive costs.
Then, at last, you will be guaranteed to earn your fair share of whatever returns our businesses may be generous enough to deliver in the years ahead, reflected as they will be in our stock and bond markets. (Caution: You’ll also earn your fair share of any interim negative returns.) When you understand these realities, you’ll see that it’s all about common sense.
When the first edition of The Little Book of Common Sense Investing was published 10 years ago, my hope was that investors would find it useful in helping them to earn their fair share of whatever returns – positive or negative – our financial markets deliver.
That original Little Book of 2007 was a direct successor to my first book, Bogle on Mutual Funds: New Perspectives for the Intelligent Investor, published in 1994. Both books set forth the case for index investing, and both became the best-selling mutual fund books ever, with investors purchasing a combined total of more than 500,000 copies.
During the near quarter-century since the publication of my first book, index funds have come into their own. Assets of equity index funds have risen 168-fold, from $28 billion to $4.6 trillion in mid-2017. In the past decade alone, U.S. investors have added $2.1 trillion to their holdings of equity index funds and withdrawn more than $900 billion from their holdings of actively managed equity funds. Such a huge $3 trillion swing in investor preferences surely represents no less than an investment revolution.
In retrospect, it seems clear that my pioneering creation of the first index mutual fund in 1975 provided the spark that ignited the index revolution. And it also seems reasonable to conclude that my books, read by an estimated 1.5 million readers, played a major role in fueling the extraordinary power of the revolution that followed.
The creative destruction reaped by index funds has, by and large, served investors well. As you read this 10th Anniversary Edition of The Little Book of Common Sense Investing, you’ll see that it stands firmly behind the sound principles of its predecessors, with new chapters on dividends, asset allocation, and retirement planning focused on the implementation of those principles.
Learn! Enjoy! Act!
Valley Forge, Pennsylvania
September 1, 2017
Charles T. Munger, Warren Buffett’s business partner at Berkshire Hathaway, puts it this way: “The general systems of money management [today] require people to pretend to do something they can’t do and like something they don’t. [It’s] a funny business because on a net basis, the whole investment management business together gives no value added to all buyers combined. That’s the way it has to work. Mutual funds charge 2 percent per year and then brokers switch people between funds, costing another three to four percentage points. The poor guy in the general public is getting a terrible product from the professionals. I think it’s disgusting. It’s much better to be part of a system that delivers value to the people who buy the product.”
William Bernstein, investment adviser (and neurologist), and author of The Four Pillars of Investing, says: “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.”
Here’s how the Economist of London puts it: “The truth is that, for the most part, fund managers have offered extremely poor value for money. Their records of outperformance are almost always followed by stretches of underperformance. Over long periods of time, hardly any fund managers have beaten the market averages… And all the while they charge their clients big fees for the privilege of losing their money… [One] specific lesson.. is the merits of indexed investing.. you will almost never find a fund manager who can repeatedly beat the market. It is better to invest in an indexed fund that promises a market return but with significantly lower fees.”
It’s really amazing that so many giants of academia, and many of the world’s greatest investors, known for beating the market, confirm and applaud the virtues of index investing. May their common sense, perhaps even more than my own, make you all wiser investors.
NOTE: Little Book readers interested in reviewing the sources for the “Don’t Take My Word for It” quotes found at the end of each chapter, other quotes in the main text, and the sources of the extensive data that I present can find them on my website: www.johncbogle.com. I wouldn’t dream of consuming valuable pages in this small book with a weighty bibliography, so please don’t hesitate to visit my website.
Chapter One
A Parable
EVEN BEFORE YOU THINK about “index funds” – in their most basic form, mutual