Summary of The Little Book of Common Sense Investing

Saturday, February 9, 2019

One of my goal in 2019 is to sit down and write summary of one book I read in that particular month. I was about to blog about Michael Hyatt's book: Your Best Year Ever but ended up finishing this one first. I have been a big fan of John Bogle and his Vanguard index fund. Thanks to him we managed to avoid the high cost mutual funds. However, we do need to be reminded from time to time to simplify our portfolio and focus on passive index fund investing instead of active trading.

The Little Book of Common Sense Investing
John C. Bogle
My advice to investor is to ignore the short-term noise of the emotions reflected in our financial markets and focus on the productive long-term economics of our corporate businesses.” John Bogle

Commonsense investing strategies:
  1. Invest at the earliest possible moment, and continue to put money away regularly from then on.
  2. Investing entrails risk, but not investing dooms us to financial failure.
  3. Risk of selecting managers and investment styles, can be eliminated by choosing classic index fund.

To cast your lot with business simple means buying portfolio that owns the shares of every business in the United States and then holding it forever.

The record of the first index mutual fund, now known as Vanguard 500 Index Fund: $15000 invested in 1976; value in 2006 $461,771.

Often, investor pay too little attention to the costs of investing. The miracle of compounding returns is overwhelmed by the tyranny of compounding costs. Taxes are costs too and managed mutual funds are very tax-inefficient. Average return of funds recommended by financial advisers: 2.9 % per year.
For equity funds purchased directly: 6.6%.

An extensive test of the ability of financial advisers to outpace the S&P 500 Index was initiated by the New York Times in July 1993. The result: Funds chosen by advisers earned 40% less than an index fund.
Selecting Long-Term Winners by not looking for the needle in the haystack, instead, buy the haystack!

William Bernstein, an investment adviser wrote, “It is simply not worth paying anybody more than 1% to manage your money. Above $1 million, you should be paying no more than 0.75%, and above $5, no more than 0.5%. Your adviser should use index/ passive stock funds wherever possible. If he tells you that he is able to find managers who can beat the indexes, he is fooling both you and himself.”

Focus on the lowest cost index funds, the more the managers take, the less the investors make.
All index funds are not created equal. For example, there are 100+ index mutual funds tracking S&P 500 index but more than half carry an initial sales load with heavy annual fee. Select only index funds that are available without sales loads and operating with the lowest costs.

Investment portfolio suggestion:
95% or Serious Money account = 50% - 100% index funds
For stock, Consist of:
  1. < 20% low cost emerging market index fund
  2. 85% in S&P 500
  3. 5% in small cap
  4. 10% in value index fund
  5. Bond. How much in stock vs bond? Rule of thumb: hold a bond position equal to your age. 20% when you are 20, 70% when you are 70.

5% can be your Funny money account, not your rent money or college education funds for your children, not your retirement nest egg.
Some Funny Money approaches:
a.      Individual Stocks: pick a few.
b.      Exchange Trade Fund
Be sure to measure and compare those return in serious vs funny money account.