Book Review: The Little Book of Common Sense Investing by John Bogle

This is a catch-up review for The Little Book of Common Sense Investing by John Bogle. When this book first came out in 2007, I listened to the audio book version. I thought it’s a great book but I never took the time to write a review for it. I read the actual book again last week.

I admire John Bogle. I thought he is the missing name on Forbes 400 List. He’s the founder of The Vanguard Group. Vanguard is best known for its low cost index funds.

John Bogle has always been an advocate for investing in diversified, low cost index funds. The message in this book shouldn’t be a surprise. It makes a great case for keeping it simple and buying index funds that own the entire market. The argument for not paying high expenses on mutual fund management is very compelling.

The only reason for paying a high expense would be getting access to managers who beat the market, but there is no guarantee any manager can beat the market. Yes, some managers beat the market in the past, even after the high expenses were taken into account. But you are investing for the future. You don’t have a time machine. Whether any manager is able to beat the market in the future is anybody’s guess. Chances are not good because of high fees, turnover, and taxes. If you pay a high expense, you are paying for a hope, which may or may not be realized. Why gamble?

I really like the story of the Gotrocks in Chapter One, which was first told by Warren Buffett in his 2005 Letter to Shareholders (page 17). The Gotrocks family owned everything until some Helpers arrived and offered some family members the chance to earn more from their investments than other family members. Then the other family members also hired Helpers. The more Helpers they hired, the less all family members earned. The financial intermediaries are exactly like the Helpers. They carve out a piece from the investment returns to themselves, risk free, leaving the rest to investors who took all the risk.

With the Little Book format, Mr. Bogle finally connected with the target audience who need the message the most: the beginner investors. The size of the book is small; theĀ  chapters are short. It’s an easy read. If someone reads this book in the early years of investing, he or she will benefit the most. One can afford to make some mistakes with small investments. Once the size of the portfolio gets large, the mistakes can be very costly.

Besides making the case for investing in index funds, as opposed to investing in actively managed funds, Mr. Bogle also expressed his skepticism toward fundamental indexing and specialized ETFs. I also don’t believe in fundamental indexing, although I do have a few value ETFs. I think some of the sector ETFs, like the often ridiculed HealthShares Cancer ETF, are just crazy. The HealthShares ETFs were eventually liquidated at the end of 2008.

If I have to pick a nit with this book, it’s the “Don’t Take My Words for It” section at the end of each chapter. Here Mr. Bogle quoted other people in support of the arguments presented in the chapter. After identifying the financial intermediaries as croupiers who extract values from investors, he quoted some of the people who work for those croupiers. Even Jim Cramer got a quote. It’s really not necessary. Mr. Bogle’s arguments are already very clear and compelling. He didn’t need Jim Cramer to back him up.

Rating: ***** (Excellent). Recommended for beginner investors and for investors who are still paying too much and receiving too little.

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  1. Harry Sit says

    Jeff – I read it and I agree with what he said in the Battle book, although I’m not sure what individual investors can do beyond not feeding the expensive mutual fund companies.

  2. Jeff says

    TFB – Yeah, thats the part that I didn’t quite get: what can I do? It says that all of the incentives are wrong in the finance industry and in corporations in general. Considering the state of the U.S. economy today, it is quite prescient.

  3. sam seattle says

    I learn something new to avoid: fundamental indexing. I had to google to find out what it is about.

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