The Little Book Of Common Sense Investing

John Bogle is the founder and retired CEO of Vanguard, and the Vanguard/Bogle investment philosophy struck such a chord with me that it was the final piece that convinced me to start investing and along with Warren Buffett and Benjamin Graham are one of the three investors whose ideas and principles I truly value. So, when I saw Bogle had written a book with a title like The Little Book of Common Sense Investing, I had to give it a read.

This is the third volume in the “Little Book” series, which are intended to be introductions to specific investing philosophies . This time around, the philosophy is the Bogle philosophy, which is that the smartest investment for most stock market investors is the broad low-fee index fund. Let’s take a stroll through this little book and learn what’s within those red covers.

A Walk Through The Little Book of Common Sense Investing

This small book is divided into eighteen chapters, each ten to twenty pages long, that spells out piece by piece the ideas behind the philosophy that one should do their investing in low-cost index funds. The brief chapters are perfect bite size pieces to read during a spare moment, like eating lunch, waiting for an interview, or so forth; this is an aspect of the “Little Book” series that I quite like.

Chapter 1: A Parable

You can read this first chapter in its entirety on John Bogle’s personal site, but suffice it to say that much of the chapter focuses on a retelling of Warren Buffett’s classic tale of the Gotrocks and the Helpers. In a nutshell, the point of the tale is that individuals that you have to pay to help you make wise investment choices are actually taking money away from you instead of helping you make more money. The moral is, in Buffett’s words, that for investors as a whole, returns decrease as motion increases. An effective individual investor should thus look for steady investments with few middlemen - and middlemen that charge minimally for their services.

Chapter 2: Rational Exuberance

From the Gotrocks parable of the first chapter, Bogle attempts to apply the lesson of the story to stocks. He compares, over the long term, the return on investment for businesses versus the return on investment for stocks and finds that their correlation is very tight. What does that mean? Over the long haul, an investment in the stock of a business will match the success of the business itself. There may be short term twists in investor emotions, but when you buy a stock for a long haul, you’re buying into the underlying business. Thus, short term stock market investing is a completely different game than long term investing, and Bogle admits to not having an understanding of investor emotion which is required to play the short term game. I guess if you’re interested in short term individual stock picking, turn to someone like Jim Cramer.
More at:http://www.thesimpledollar.com/2007/05/04/review-the-little-book-of-common-sense-investing/