The Little Book of Common Sense Investing is about the benefits of index investing. This should be expected considering it was written by John Bogle. For those of you who don’t recognize the name, John Bogle started The Vanguard Group in 1974. Bogle is one of the most important minds behind the passive investing school of thought. Bogle and his growing band of followers believe that focusing on low-cost investing and tax efficiency is a better strategy than chasing performance. On most issues, I agree. His logic is simple and clear and his examples are light enough for anyone to understand.
This particular text is part of the “Little Book Big Profit” series, all of which can be defined by their clear and concise writing style. I did find it somewhat funny that this book reaches a point (index investing is best) which is directly at odds with the conclusions of the other two books in the series. The first, written by Chris Browne, concludes that investing for value is best. The original book in the series, written by Joel Greenblatt, uncovers a strategy which the author claims actually beats the market. I suppose it is coincidental and playfully ironic that so many brilliant minds can conclude such different things. If you want a quick overview of index investing which is probably worth its weight in gold, pick up this book. I was finished with it in 2 ½ hours.
The book has 18 chapters, most of which hit on the same point from a different angle. We learn in the second chapter that accidentally developing a fascination with stock market returns is dangerous and ignores what the game is really all about. Bogle believes stock investors are ultimately trying to gain an advantage through the long-term economics of corporate business. In other words, buy index funds. Chapter five goes into the unfortunate but natural pattern of chasing after performance which many people fall into with their actively-managed funds. In other words, buy index funds. Chapter ten talks about the underperformance of equity funds which are recommended by brokers and advisors. I can’t say I enjoy this side play on broker bashing, but his point is still that investors should buy index funds. In this case, to avoid having to make decisions as to how, when, and what type of funds to purchase. We could play this game for each chapter, but you get the point. Bogle covers every counter argument which one might make about why index investing isn’t necessarily best.
One chapter which caught my attention was #14. Bogle talks about the index fund craze and how different companies are trying to take advantage of it. He mentions the new trend towards fundamentally-weighted indexes (i.e. trying to beat the performance of market-cap indexes). You can actually hear the distaste in Bogle’s voice when he talks about money managers who promote fundamental-indexing. To be quite frank, I use both market-cap and fundamental-weight indexes in my practice. I think both have something to offer and I don’t place one higher than the other. Market-cap indexes have been around for much longer, but fundamental-weighting is a very easy argument to make. I found it interesting how Bogle decided to address this issue, if not just as a tool to dismiss it. He even ends the chapter by quoting Jeremy Siegel, a Wharton Professor who sided with Bogle in the early 90’s but has since become an authority in the opposite camp.
The following chapter hits on exchange-traded funds–the obvious competition for Bogle and his index mutual funds. Bogle takes the stance that ETFs aren’t as good as index funds because they encourage trading–which ultimately hurts the investor. Without reading the chapter, I would find it tough to argue that a disciplined investor isn’t better off (spending less money) in an ETF. That being said, I agree with most of Bogle’s criticisms and I actually expand upon similar points in my own book.
In conclusion, this was a great text. Simple, accurate, and informative. My criticisms? Perhaps a bit self-promotional, even if not in the most direct way. But John Bogle is an investing legend and I’m thrilled to read and review any of his works.
Russell Bailyn
Premier Financial Advisors
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