The Little Book of Common Sense Investing: The Only Way to Guarantee Your Fair Share of Stock Market Returns by John Bogle is a great introductory book that helps develop the correct mindset about investing. The book outlines how to amass wealth with little to no effort. John Bogle also talks about various pitfalls and things to consider when investing your money. In this week’s blog post, I will talk about the 7 key takeaways from this book. Let’s dive in.
- Over the long term, stock investment returns are created by real investment returns earned by real businesses. Real investment returns is the annual dividend yield earned by public corporations plus subsequent rate of earnings growth.
- Over the short run, speculative returns are born from the impact of the change in what investors are willing to pay for each dollar of corporate earnings, and this change in willingness can increase or decrease investment return. However, in the long run, speculative effect washes out. The key takeaway is that in investing, the winning strategy for reaping the rewards of capitalism depends on owning businesses, not trading stocks.
- Individual businesses have come and gone in the past. It is better to buy the haystack.
- The best protection for individual investors from risk inherent in individual stocks is diversification. The most important thing to recognize is that by owning all US stocks via an index fund is the ultimate risk reduction strategy.
- As a group, all investors in the stock market earn the market’s gross returns. When market provides 8% return, investors divide up the 8% return before taking into account the costs.
- Don’t forget about costs such as commission fees, marketing expenses, sales loads, administrative expenses, legal expenses and custodial fees. The key takeaway is that net return for investors as a group is equal to gross market return minus cost.
- While all investors as a group must earn the markets net return, mutual fund investors, who depend on their emotions and the fund industry, have done worse by making serious errors of timing and fund selection. It is important to note that net return earned by mutual fund investors as a group is equal to gross market return minus cost minus timing and selection penalties.
John Bogle captured a lot of good information in this short 5 hour audio-book. The topics ranged from how more money the managers make, the less money is passed down to the investors to what does a well diversified portfolio mean? (Bogle said that a well diversified portfolio could mean – 70% of portfolio in Wilshire 5000 index fund and remaining 30% in international index fund). The book emphasizes that investors should strive to minimize expenses. Towards the end of the book, Bogle said that it was fine to chase the hot tip and speculate, but he claims that such speculative approaches should be performed within your “funny money” account, which should be no more than 5% of your account; the core (serious money account) represents the other 95% of the assets. Bogle also advised not to speculate on ETFs, but rather invest in them. Lastly, he would like investors to stay away from commodities (as they are speculative in nature) and hedge funds.
Overall, I thought this book is great for people who don’t want to get too involved with the market, but yet want to utilize the power of capitalism. Bogle not only provides his views, but also incorporates other investors’ opinions in this book. I would recommend this book to anyone who is interested in investing and wants to avoid the common pitfalls when allocating his/her capital.
Hope you learned a little and found this blog post helpful. We talked John Bogle’s approach to investing in his book: The Little Book of Common Sense Investing : The Only Way to Guarantee Your Fair Share of Stock Market Returns. As always, you can sign up for our free mailing list here. You can sign up for our paid subscription services here. Like us on our Facebook page here. Thank you!
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