Customer Reviews

The Little Book of Common Sense Investing: The Only Way to Guarantee Your Fair Share of Stock Market Returns (Little Books. Big Profits)

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This latest book from Vanguard founder John Bogle is a gem. For those of us who are investment junkies, his past works have been superb, but a little overwhelming for regular readers who need their guidance in smaller and more direct terms.

The Little Book of Common Sense Investing fills that void. For Bogle fans, this is a summary of what we already know and you will not find a lot that is dramatically new or different. For readers who need a stern lecture on what is right and what is wrong, this is a perfect guide.

One nice touch in this new book are a variety of quotes Bogle uses that say "If you don't believe me" or "Don't take my word for it". He quotes Warren Buffet, Benjamin Graham and other major figures that confirm the advice he gives is right.

With all the large confusing investment books on the market today, this one provides a small friendly guide that allows the reader to focus on the behaviors that lead to success in investing. This is the finest new book on investing in 2007 and a must read for all investors who need to cut through the noise to find the truth. Thank you Mr. Bogle!

Mike Kavanagh, CFP ®
Atlanta, GA

John Bogle created the world's first index fund in 1975. In this book, he describes why you should make index funds the core of your investment portfolio.

Bogle starts off with introducing index funds through a parable that describes how middle-man costs in finance eat away at investors' profits. He discusses why speculation doesn't work and why business reality (in his definition, divident yields plus earnings growth) is more important that market expectation (changes in P/E based on what investors are willing to pay for various equities).

Bogle spends a few chapters discussing various problems with regular actively managed mutual funds, covering issues with performance (he asserts that less than 1% of all mutual funds were able to beat the market consistently over the past half century), various costs (expense ratios, sales charges, advertising fees, turnover costs, tax implications), poor market timing, and finally the difficulty of choosing a mutual fund (he states that there's no good way to pick a fund, since we can't foretell the future, and past performance is not an indicator of what's to come). He brings the reader to the "common sense" conclusion that index funds, in their pure simplicity, are the logical choice for any investor, as they provide the diversified return of the entire market with miniscule fees and minimal effort.

The last few chapters cover bond funds, ETFs, and a few pages of investment advice - which boils down to keeping at least 50% (if not all) of your money in broad-market index funds. Interestingly, Bogle spends a chapter discussing what Benjamin Graham would have thought about index funds, citing various quotes from Graham's "The Intelligent Investor" and certain blurbs from Warren Buffet. He, of course, concludes that Graham would have praised index funds.

So, did I like the book? Yep.. it was pretty good. Bogle writes very clearly and visibly tries to keep his discussions simple and to the point, so as to appeal to the widest possible audience. And with good reason! Bogle's advice is very applicable to the many individual investors today - index funds are a great low-cost and low-maintenance way to get your share (or all, as Bogle suggests) of the market's return.

To convince the reader, Bogle uses many diagrams to illustrate returns of various mutual funds vs. index funds, and to compare what your original investment would look like after a certain time - based on how it was invested. I found an error in one of the diagrams - exhibit 10.1 (and the text around it) on page 108 lists the average fund advisor return as $188,500 instead of $88,500. Not a big deal, but it slightly undermines the point he's trying to make on that page. Overall, I feel that Bogle's diagrams illustrate some good harsh realities - he clearly illustrates how a few percentage points (i.e. the costs associated with actively managed mutual funds) can eat away enormous chunks of your money over time.

To bring more authority into his argument, Bogle provides a "Don't Take My Word for It" section at the end of each chapter, where he quotes various respected investors and professors to support the points he made in the chapter. I enjoyed this, but it's important to be aware that some quotes can often be interpreted very differently outside a certain context.

One very obvious issue with this book is that Bogle is selling his own product - Vanguard's funds. He doesn't try to hide this in any way. He uses Vanguard's funds in nearly all examples, and he often hints how his "world's first index fund" is the greatest thing since sliced bread. You can't really blame the man - his contribution to the world of finance and investing is enormous, and he damn well should be proud of his accomplishments. So I think it's okay to cut Bogle some slack in this area.

The book is short - about 215 small-size pages. You can probably sit down and read it in a few solid hours. It also goes pretty quickly, as the material is not dense and easy to follow. However, some may argue that the book is too long for what it is trying to demonstrate. True, Bogle's advice really can be summed in just a few pages - index funds are a great choice for the average investor. But I have to say that I enjoyed reading the examples and history that he provides.

In conclusion, I recommend this book to any individual investor. While Bogle's advice is in no way eye-opening or revolutionary (chances are, you already know that index funds are a very low-cost and low-maintenance way to diversify), it is good to remind yourself the reasons why you should stay away from most actively managed mutual funds. As Bogle describes, this is all common sense - but we're often blinded by flashy advertisements, hot market sectors, and seemingly-reachable dollar signs. This book is a good reality check for the average individual investors.

I wish I could give this book 4.5 stars - but since I can't due to Amazon's rating system, I feel that it is more of a 4-star book rather than a 5-star one. It has solid advice, but it should not be considered the end-all of investing, and some of the advice and quotations should be taken with a grain of salt. Overall, however, it's a great and insightful read. I plan to buy a couple extra copies to give to my family.

Pros:
+ quick and easy read
+ lots of examples and diagrams to demonstrate how high expense ratios and other hidden costs can devastate a portfolio's return
+ some good basic investment advice: buy and hold, avoid emotional decisions, don't be enticed by "new hot trends" (as by the time you find out about them, prices are already inflated), diversify into the whole market, look into costs before buying, etc.
+ great format - short chapters, useful data, neat quotation sections at the end of each chapter

Cons:
- some may be turned off by Bogle's plugs for Vanguard funds (this didn't really bother me)
- may seem lengthy to drive one main point home (but keep in mind that there are quite a few good tid-bits scattered throughout the book)
- take some citations with a grain of salt

Who better to make a straightforward argument for the index mutual fund than the man who developed the first of its kind for Vanguard in 1975. The stock market offers the return of the businesses it represents to investors. These returns are not received, because rather than 'buying' the market with a fund that tracks those returns, investors are sold actively managed funds that try to outperform the market and in the end dilute those returns with crippling fees and costs from excessive trading. The argument has been made by other distinguished writers in recent years, but investors will find this industry giant's take on the matter forceful.

What's new is Bogle's sobering expectations for future market returns. Over the past century companies have produced a 4.5% dividend yield and a 5% earnings growth rate (9.5%) for investors - before actively managed fund costs have stripped away much of that wealth. Today dividend yields on equities are under 2%. Earnings growth rates in the future may or may not be lower than the historical average. What seems apparent is that investors are less willing to pay for those earnings than they have in the past - as measured by a decline in price earnings ratios. Bottom line: we may be looking at a period of market returns of just 7-8%, and after all the "intermediary" costs of the mutual fund industry, investors will see that return dramatically reduced. This is why costs matter. The index mutual fund is the least expensive way to get the market's return into your pocket. Unfortunately, many 401 (k) retirement plans do not include some of the key U.S. and international indexes recommended by Bogle.

Bogle's view of the flood of ETFs (exchange traded funds) that slice and dice markets into specialized sectors is that they have only increased risk with the illusion that they have diversified it away. They are a "wolf-in-sheep's clothing". That they can be so actively traded (long and short) defeats the underlying idea of owning the market for its long-term gains. Ultimately ETFs fail to offer the "quintessential" promise of a total stock market index fund to "earn [a] fair share of the stock market's returns". He sarcastically suggests they carry warning labels. Industry insiders will sit-up at Bogle's swipe at noted Wharton professor, Jeremy J. Siegel (author of the widely admired, STOCKS FOR THE LONG RUN). Recently Siegel has helped promote a family of ETF securities that shift the composition of the underlying indexes from a traditional capitalization weighted model to one that emphasizes dividends. For Bogle, these are siren songs based on data mined ideas that my or may not work in the future.

Author John Bogle makes a compelling case for index funds as THE wisest investment vehicle as opposed to active traded or managed funds. He argues persuasively that actively traded funds are fraught with costs that compromise yield and that trying to "beat the market" is a Loser's Game that only enriches the intermediaries such as stock brokers and investment managers. Two concerns, though.

The book's title somewhat overreaches, though, given its almost exclusive focus on index funds. The title implies a broader perspective on investing, whereas the laser-like focus is on index funds. As a result, I personally have a "truth in advertising" issue with the book.

Second, the book is a one-idea treatise that beats the dead horse again and again and again to the point where it is overkill and repetitious.

These are relatively small quibbles. Anyone holding investments or considering embarking on an investment program should read THE LITTLE BOOK OF COMMON SENSE INVESTING, subject to these two caveats.

What's in the book is just what the title says - obvious common sense.

This book is for people that want to move up their financial goals by using techniques so simple, my son Kevin implemented them last year when he was in second grade. Don't confuse simplicity with stupidity, Bogle notes.

If these techniques are really so simple, why doesn't Wall Street "get it?' Because they are paid a small fortune not to understand it. In fact, it's critical that the grand illusion continue.

The book is a battle pitting the Wall Street machine, glitz, and emotion against only the relentless rules of simple arithmetic. Even Wall Street, however, doesn't have the might to overcome simple arithmetic. It's a bloody battle where most that try to disprove mathematics, end up being the casualties.

You may be thinking this book merely says to buy index funds or exchange traded funds. Actually, Bogle notes that many index funds and most exchange traded funds are the wrong thing for investors. Yes, Wall Street took his indexing concept and morphed it into vehicles that would make them rich, at the cost of the investor. These are known as "enhanced" or "specialized" funds that are far closer to active investing than many disciplined investment funds - like Berkshire Hathaway.

Bogle explains what investors should do to capture the returns of capitalism. You may be surprised to learn that he goes beyond saying only own the broad index funds. In fact he says individual stocks and active mutual funds are okay, under certain conditions. It's okay to have a little fun, he says.

If you are absolutely convinced that you or your advisor will beat the market, then don't read this book - it will only make you sick to your stomach with irrefutable logic. This book is only for those wanting to guarantee your fair share of stock market returns.

The Facts Are In The Numbers

There is a repetitive theme in this book, not redundance. And it's supported by expert analysis, portfolio comparisons, and the numbers: "humble arithmetic." Over time Index Funds out-perform most managed mutual funds. The longer the amount of time, the more detrimental the damage - if - you own managed funds. "Where returns are concerned, time is your friend. But where costs are concerned, time is your enemy."

Bogle notes (like so many others) how fund advertisements mislead and outright lie by stating that "X fund has an annual average return of 12% per yer," but omits the costs: portfolio transaction costs, Load charges, 12-1bs, and taxes accrued on realized gains. (And inflation must always be factored.) The S&P 500 rose by an average of 12 percent for twenty years, but most managed mutual funds got far, far, lower returns than that.

The 4 E's: Enemies of Equity investors are Expenses and Emotions, according to Warren Buffet.

Financial Intermediation has created enormous fortunes for those n the fields of managing other people's money.

One example:
Merrill Lynch is the largest brokerage firm in the world. One of its biggest marketing and profitable successes also created one of the biggest losses for investors. At the height of the bubble in 2000, Lynch launched two new funds: the "Focus Twenty" and the "Internet Strategies" Fund. Like clockwork, at the height of the bubble frenzy the consumers were drawn in. The best time to sell a fund is the worst time for consumers to buy it. $2 billion dollars poured into Merrill Lynch. "Internet Strategies" sank almost immediately and lost 86 percent, while the "Focus Twenty" (which comprised the top 20 favorite stock picks of Merrill Lynch managers) lost 28% in 2000, 70% in 2001, and 39% in 2002 (p. 106). Ouch. A lot of funds declined in this three-year period, but not nearly as much. Funds chosen by managers earn 40 percent less than index funds, in general (source, NY TIMES).

But it's not just John Bogle that states this. Bogle hits home with his "Don't take it from me" passages throughout the book, quoting and sourcing what other financial minds say about managed vs. index funds, and organizational and individual investment psychology. There are tons of exhibits and tables with comparisons. Sources are provided throughout.

Relation to 401K and IRAs:
IMO, regular non-IRA (non tax deferred) index funds can be a vehicle that supersedes endangered Defined Pension Benefit Plans for those wanting to add more than the limits, or simply supplement the IRA and 401K limits to retirement accounts. Or, add more diversification and control over one's portfolio. Indexing can also be useful for those that don't have the two tax-deferred options available to them and is another choice because of low taxation and low expense costs.

Including indexing another but related topic, company pensions can inhibit and limit the worker. They often anchor employees into a company or industry. Many want to change, but stay and wait to cash out. The pension fund makes the rules. They tell you how long to stay to receive X amount.

This the best investment book I've ever read. It's also been the most honest.

"The Little Book of Common Sense Investing" is the third book in the Little Book series from Wiley. I reviewed the previous two, "The Little Book that Beats the Market" and "The Little Book of Value Investing".

The first book (Beats the Market) really captured my attention. In fact, after reading it last year I went out and invested in some of the stocks the author recommended on his site (more on that in a moment). I quickly realized that if I truly wanted to follow the "Beats the Market" approach I was going to have to spend more time on investment research than I originally planned. That's where "The Little Book of Common Sense Investing" really shines.

Bogle's book is all about index funds and why they're the smart alternative for just about any type of investor. Rather than trying to beat the market, and risk coming up short, why not just match the market's results with a good, low-fee index fund?

I won't try to go into all the details in this short review, but the author also predicts weaker stock and mutual fund performance in the coming years. Although nobody can predict the future, of course, his logic is hard to refute. It also makes index fund investing look like a very smart choice.

As I mentioned earlier, I invested in 7 different stocks shortly after reading "The Little Book that Beats the Market". Those stocks, along with their performance to date are as follows: ASPV (down 18%), CECO (up 41%), BVF (up 44%), OVTI (down 11%), WON (down 2%), ALDA (up 20%) and GIB (up 27%). Those mixed results clearly highlight the importance of a diversified portfolio!

Speaking of a balanced portfolio, after reading "The Little Book of Value Investing" I wound up putting a good portion of the rest of my money in an index fund, VBINX, which is up 4% since I invested. All those investments are up a total of 8.4% to date...not bad, given that I only bought all these about 6-7 months ago.

Now that I know I don't have the time to keep rolling things over and figuring out what new stocks to pick, I think I'm going to liquidate all the stocks shortly and go with the Vanguard 500 Index, VFINX. Could I make more money by playing the buy-and-flip game? Maybe, but I'm in this for the long haul and am perfectly content to follow Bogle's advice on index funds.

As a professional portfolio manager since the 1960's [now retired] I most highly recommend this book. I have purchased copies for my adult children, as well as for some for-profit and non-profit boards on which I serve. I am telling all that this easy, one-day read has the potential to be a financial life-enhancing event, if they agree with the basic premise. And that there is no reason not to agree with the premise. I very much like that Bogle includes supporting data at the end of every section. A true five-star book.

Jack Bogle's latest book provides an excellent introduction to low-cost and low-risk Boglehead-style investing. The subtitle reads "The Only Way to Guarantee Your Fair Share of Stock Market Returns", but that is too modest. In fact, the content nearly guarantees that an investor can receive better returns than 90% of invested money over the long term.

When buying this book, I was looking for a good book to give friends and family who are still gambling with individual stocks and actively-managed mutual funds. Bogle's new book comes close to the mark, and is especially compelling when demonstrating that index funds are a better investment than active mutual funds for most investors.

The role of taxes, fund expenses and investor behavior on investors' returns is solidly brought home in this book. Not much new information for the already-converted Bogleheads among us, but good intellectual wisdom for investors not familiar with these forms of investment return thievery.

This book also includes a discussion of bonds and bond funds, where similar points are driven home.

Common Sense Investing is less compelling in demonstrating that index funds are better than individual stocks for most investors. The risk of individual stocks is described as uncompensated, but it could have benefited from more persuasive quantitative evidence to bring home the point.

Bogle projects the next decade's stock market returns, which is a bonus. Bogle provides persuasive rational for relying on dividend yields, earnings growth and changes in speculation in describing returns.

The Table of Contents is less than 100% descriptive of the contents and the absence of an index makes it a little difficult to use the book as a reference.

Common Sense Investing is a great book, but would have benefited from more discussion of asset allocation, which is a huge determinate of returns. Thus it does not stand as a single book to guide investment decision-making.

A great gift book to give to stock market gamblers.

I can sum up the entire book in a short paragraph:

Buy low expense index funds. You probably can't beat the market, so don't spend a lot of money/time trying to do so.

The author makes his point over and over again, with frequent "I told you so" examples, which is a bit annoying. The book would have made a great 6 page magazine article.

That being said, Bogle did convince me that he is right, leading to a radical change in my investment strategy.