The Little Book of Common Sense Investing: The Only Way to Guarantee Your Fair Share of Stock Market Returns is a 2007 and 2017 book on index investing, by John C. Bogle, the founder and former CEO of the Vanguard Group.
The Little Book of Common Sense Investing Summary
Benjamin Graham’s Intelligent Investor was published in 1949. He was considered his era’s most astute money manager, and his book is a classic of sound investment advice.
He points out that most investors do not have the professional training, expertise, or time to analyze the worth of companies and the value of their current stock offerings. Nor do they have the ability to predict what a company’s stock value will be at some future point in time.
He therefore advised his readers to be consistently conservative in their stock choices. He advised investing in a “defensive portfolio,” an overly broad selection of diversified stocks which, once purchased should be held on to for the long term.
Graham warned investors against relying too heavily on brokers who make their money through trading commissions. The Little Book of Common Sense Investing!
He pointed out that such brokers’ short-term financial interests clearly conflicted with their clients’ long-term investment goals. Graham further explained that, mathematically, the odds never favor the individual broker or investor.
Index investing is a winning strategy because the portfolio owns all the nation’s publicly held businesses at a very low cost, while capturing almost the entire return that the businesses generate from earnings growth and dividend distributions. The Little Book of Common Sense Investing!
The magic of compounding investment returns adds additional value to an index investing portfolio. Over the long term, stock market investing has been a winner’s game because of the growth, productivity, resourcefulness and innovation of companies and capitalism in creating wealth for business owners. Owning stock/equity index funds provides you with partial ownership of all the publicly traded businesses on the stock market.
For the last 25 years, the annual stock market return on the S&P 500 has been around 7%. Since the early 1900s, the average annual total return on stocks has been around 9% (with 4.4% from dividend yield and 4.6% from earnings growth).
Successful investing is about minimizing the share of returns earned by companies and maximizing the share of returns delivered to the individual investor. Individual investors can do this by buying and holding a total stock market index fund, instead of individual stocks, for the long-term.
The reversion to mean (RTM), also known as the tendency of price/earnings (P/E) multiples, are to return to their long-term norms over time. When there is below average performance on the stock market, they tend to be followed by periods of recovery. For example, the negative 1910s were followed by the roaring 1920s, and the dispiriting 1940s were followed by the booming 1950s.
In the long run, stock returns depend on the reality of investment returns earned by businesses. The perception and emotional swings of investors are reflected by speculative returns and are difficult to accurately forecast in the short-term. However, you can forecast the long-term economics of investing because investment returns (earnings and dividends) are almost completely responsible for long-term stock market returns.
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About the Author
John Clifton “Jack” Bogle was an American investor, business magnate, and philanthropist. He was the founder and chief executive of The Vanguard Group, and is credited with creating the first index fund.
