By JLP | March 14, 2007
I received a copy of John Bogle’s The Little of Book of Common Sense Investing earlier this week. This book is the third in “The Little Book” series. The funny thing is, if you read Bogle’s book first and believe what he says, you won’t need to read the other books in “The Little Book” series.
The book opens with a parable adapted from the 2005 Berkshire Hathaway Chairman’s Letter (the parable can be found on page 17 under “How to Minimize Investment Returns”), which explains how costs can really eat into returns. Bogle then goes on to explain the source of investment returns (dividends, earnings growth, and changes in P/E ratios), showing that the easiest way to take part in these returns is by buying ALL the businesses through an index fund.
Bogle also dedicates several chapters to the costs of investing: mutual fund fees and expenses, bad decision-making and timing by investors, and taxes. You simply can’t ignore the impact of all the costs on investment returns. As Bogle states, “The miracle of compounding returns is overwhelmed by the tyranny of compounding costs.” It’s hard to argue with that.
In many ways The Little of Book of Common Sense Investing comes across as a sales job for index funds but that’s just proof as to how much Bogle believes in indexing (as long as it is low cost). Bogle also doesn’t have a problem telling readers what’s really on his mind, which I found refreshing. He likes the market cap-weighted indexes (like the S&P 500 Index) and is very skeptical about fundamental indexes. In fact, he dedicates a full chapter to discussing Wisdom Tree Investments (although he doesn’t ever mention their name), which is a company offering exchange-traded funds based on fundamental indexing.
One feature that I really enjoyed in this book was that each chapter ends with a little section titled “Don’t take my word for it,” in which Bogle then offers up the opinions of various other experts like Warren Buffet, Benjamin Graham, Peter Lynch, and many other investors and investment thinkers of our time. I thought it was kind of funny that Bogle quotes Jeremy Siegel touting the benefits of market cap-weighted indexing at the end of the chapter on fundamental indexing. For those of you who don’t know, Jeremy Siegel is an advisor to Wisdom Tree.
The last few chapters deal with bond indexing and asset allocation (briefly). Bogle finally gives readers permission to “play” in the market by buying individual stocks or actively-managed mutual funds as long as they promise NOT to invest more than 5% of their assets. In other words, go ahead and shoot for the moon with your fun money but trust the bulk of your investments to indexing.
I think The Little of Book of Common Sense Investing should be considered must-reading for anyone who is investing. It’s simple and easy to understand and is a very quick read (remember it’s a “Little Book”). This “Little Book” is destined to become a classic (it already is in my book).
Other reviews of The Little of Book of Common Sense Investing: