by Looking for more investing knowledge? Do a search for “best investing books” on Google and one of the books you are likely to see is The Little Book of Common Sense Investing.
The quote on the cover is from legendary investor Warren Buffet. The author, John C Bogle, is an investing legend himself.
Just because someone is a legendary investor doesn’t make them a great author. In Bogle’s case this book is amazing.
In our book review series our goal is to give you highlights of the book. We will provide you with a little bit about the author, lessons from the book as well as reasons to read it if you so choose.
Who is John C Bogle?
John C Bogle invented the Index Mutual Fund. He set out to create a way for investors to get their fair share of market returns.
He founded Vanguard in 1974. It is the largest issuer of mutual funds in the world and the second largest issuer of ETF’s according to investopedia. They are continually focused on delivering low cost mutual funds. Many of their mutual funds charge 94% less than the rest of the industry and some are the lowest in the industry.
The company he built and led from 1974 to 1996 was built on putting investors first. It is a company that is owned by the investors. Along the way he also wrote 10+ books and has been praised by such investing legends as Warren Buffet for his strategies.
Core Lessons from The Little Book of Common Sense Investing
This book, while it has Little in the title, packs a ton of information. Mr. Bogle lays out the case how investors are not getting their fair share of the market. He outlines how costs need to be watched. Bogle details how the majority will not beat the market so it’s better to get your maximum share of the market gains.
Let’s dig deeper into a few core lessons from the book.
Costs Matter…More Than Many Investors Care to Admit
Costs are how mutual fund companies make money. It affects the investors return. Bogle is clear in that he believes investors should look after themselves.
Bogle uses the example for both active and passive index funds. Active funds are where a manager tries to beat the market. Passive funds follow the market with little manager involvement.
Comparing passive or index funds where one fund charges .03% and the other charges .44% is a .41% difference in favor of the mutual fund company. While this may seem like a small amount of money it adds up over time. Bogle has charts, graphs, and data to show that the smart investor is giving up money for no reason.
You will learn to look at what your mutual fund company is charging you and to make sure that you know what you are paying and why.
Reversion to the Mean…Understanding this is Key to Fund Selection
This was a new concept that we hadn’t learned before. It’s always nice to learn something new. Reversion to the mean is the theory, which Bogle proves in the book, that mutual funds will eventually go back toward the mean. In this case the mean is the average of the S&P 500 average as a whole.
Trying to outsmart the market is difficult. As Bogle points out very few have done it for a consistent period of time. Even the legendary Warren Buffet, often quoted in the book, has said after his passing he wants the majority of his wife’s estate put in an index fund.
Simply put many managers are beneficiaries of good timing, luck, and the cost for their services don’t pay out in the long term.
Taxes Matter & They Need to Be Minimized
I don’t think I have ever heard anyone seriously state “I want to pay more taxes!”. Bogle is quick to point out that actively managed funds, as a result of strategy, can increase the taxes owed to an investor. As a result this needs to be calculated prior to making an investment decision.
Start Early, Be Consistent, & Don’t Stop
It’s often been said that retiring with a large nest egg is simple, however not easy. Bogle makes the case that the best investors should start early and consistently invest. Selecting a low cost market index fund and a low cost bond fund is a simple yet proven strategy.
Don’t Buy the Mutual Fund Industry Hype
Bogle is very practical. He outlines a fund created in the .com hype of 2000 that was created by Merrill Lynch. It raised just over $1.1 billion dollars. Unfortunately less than two year later investors had lost 71.6% of their money.
History can repeat itself if you fail to study. As Bogle points out, an investor who had kept their money in a S&P Index fund would not have suffered the same fate.
Who should read this book?
This book is a great read for the investor who isn’t sure if mutual funds should be a part of their portfolio. If you were on the fence of whether you should invest in mutual funds this book will have you chanting…low fees…low fees…low fees.
You may also come away from reading this book that a S&P Index Fund or a Total market fund should be the core of your portfolio. It’s something we believe here at Bridges Twins and we hope you will adopt it as well. Your future self will thank you.
