Book Review: The Little Book of Common Sense Investing

“This is much more than a book about index funds. It is a book that is determined to change the very way that you think about investing.” 

―John C. Bogle

Bogle, Vanguard, The Gotrocks Family & Common Sense Investing Wisdom

John Bogle is someone that I admire deeply. Maybe because he’s old, have been around for some time and acquired a lot of wisdom along the way. Or maybe it’s just that he reminds me of my grandpa that isn’t around any longer.

I especially favour the Masters in Business interview where Ritholtz talks to Bogle, an interview I must have listened to at least three or four times by now. Such a great episode. If you haven’t listened to it yet, my advice is that you go check it out. You won’t regret it.

The Little Book series contains 16 books covering different topics related to investing. The Little Book of Common Sense Investing: The Only Way to Guarantee Your Fair Share of Stock Market Returns is one of these books.

The real formula for investment success is to own the entire market, while significantly minimizing the costs of financial intermediation. That’s what index investing is all about. And that’s what this book is all about.

See here for an excerpt of chapter one “A Parable: The Gotrocks Family” where you will find the story about the Gotrocks Family and their fortunes and mis-fortunes in their investment (or speculation) endeavours.

Bogle himself is the founder of Vanguard, one of the world’s largest mutual funds and investment companies with about $3.5 trillion (that’s right, trillion…) in assets under management and an average expense ratio of 0.18%. Vanguard’s core purpose is:

To take a stand for all investors, to treat them fairly, and to give them the best chance for investment success


Source: Facts About Vanguard, December 9, 2016

The Little Book of Common Sense Investing

The underlying theme of The Little Book of Common Sense Investing is how you, as an investor, make investing a winner’s game by investing regularly with a long-term focus in mind in a low-cost index fund–without caring about beating the market–and as a result most likely will end up with better total returns then the returns generated by maybe 80 or 90 percent of the professional active money managers.

Investing is all about common sense. Owning a diversified portfolio of stocks and holding it for the long term is a winner’s game. Trying to beat the stock market is theoretically a zero-sum game (for every winner, there must be a loser), and after the substantial costs of investing are deducted, it becomes a loser’s game. Common sense tells us—and history confirms—that the simplest and most efficient investment strategy is to buy and hold all of the nation’s publicly held businesses at very low cost. The classic index fund that owns this market portfolio is the only investment that guarantees you with your fair share of stock market returns.

The Little Book of Common Sense Investing will serve as your guide, with Bogle as your mentor, on how to incorporate Bogle’s proven low-cost index fund investment strategy. The reader is introduced to some historical background–efficient markets, value investing–and also on what experts and academics have to say about index investing.

Bogle begins the book with the story about the Gotrocks Family. The essence in this story is that the more they trade, the more they loose, and the more the so-called Helpers gain. With a focus on the fundamental value drivers–dividends and earnings growth–and by providing insights about the impacts of transaction activity, costs, taxes and inflation, Bogle lays out his thesis in favour for why the layman should buy a low-cost index fund and hold it forever.

The moral of the [Gotrocks] story, then, is that successful investing is about owning businesses and reaping the huge rewards provided by the dividends and earnings growth of our nation’s—and, for that matter, the world’s—corporations. The higher the level of their investment activity, the greater the cost of financial intermediation and taxes, the less the net return that the business owners as a group receive. The lower the costs that investors as a group incur, the higher rewards that they reap. So to realize the winning returns generated by businesses over the long term, the intelligent investor will minimize to the bare bones the costs of financial intermediation. That’s what common sense tells us. That’s what indexing is all about. And that’s what this book is all about.

As an example Bogle provides some data for the period of 1900-2005. During these years compounding for 106 years produced accumulations where each dollar initially invested in 1900 at an investment return of 9.5 percent grew by the close of 2005 to $15,062. Pretty darn good. From this we can clearly see the power of compounding returns.

Total Stock Return: Investment Return Plus Speculative Return

In chapter two–Rational Exuberance–Bogle discusses the historical stock market return and its different components. This is one of the chapters in the book that I enjoyed the most. The total market return equals investment return plus speculative return. Investment return consists of dividends and earnings growth. Speculative return is measured as the change in the price-to-earnings ratio.

The average annual total return (1900-2005) on stocks was 9.6 percent, virtually identical to the investment return of 9.5 percent—4.5 percent from dividend yield and 5 percent from earnings growth. The difference of 0.1 percent per year arose from what Bogle calls speculative return, i.e., change in market or investor sentiment in a certain time period and measured as the change in the price-to-earnings ratio from the start of the period to the end of it.

This dual nature of returns is reflected when we look at stock market returns over the decades. Using Keynes’s idea, I divide stock market returns into two parts: (1) Investment Return (enterprise), consisting of the initial dividend yield on stocks plus their subsequent earnings growth, which together form the essence of what we call “intrinsic value”; and (2) Speculative Return, the impact of changing price/earnings multiples on stock prices.

Final Words

The Little Book of Common Sense Investing is a great book providing great insights about investing and what drives return (dividends and earnings growth) together with a thorough discussion about historical market returns, what to think about when investing (costs, taxes, inflation etc.) and why a low-cost index fund is the best alternative for the layman when it comes to investing for the long-term. 

I highly recommend this book as a useful guide and reference when it comes to thinking about the stock market and investing in funds. 

As Charlie Munger once said:It’s not supposed to be easy. Anyone who finds it easy is stupid. I think Bogle lays out a trustworthy case in support of this statement. For anyone investing on their own, the need of a benchmark to compare investment returns against is critical. This book truly serves as a great guide on how to think of and what different kinds of benchmarks and stock market index to look for. And also whether you should just find yourself a low-cost index fund to invest your savings into. 

Table of Contents


Chapter One: A Parable.

Chapter Two: Rational Exuberance.

Chapter Three: Cast Your Lot with Business.

Chapter Four: How Most Investors Turn a Winner’s Game into a Loser’s Game.

Chapter Five: The Grand Illusion.

Chapter Six: Taxes Are Costs, Too.

Chapter Seven: When the Good Times No Longer Roll.

Chapter Eight: Selecting Long-Term Winners.

Chapter Nine: Yesterday’s Winners, Tomorrow’s Losers.

Chapter Ten: Seeking Advice to Select Funds?

Chapter Eleven: Focus on the Lowest-Cost Funds.

Chapter Twelve: Profit from the Majesty of Simplicity.

Chapter Thirteen: Bond Funds and Money Market Funds.

Chapter Fourteen: Index Funds That Promise to Beat the Market.

Chapter Fifteen: The Exchange Traded Fund.

Chapter Sixteen: What Would Benjamin Graham Have Thought about Indexing?

Chapter Seventeen: “The Relentless Rules of Humble Arithmetic.”

Chapter Eighteen: What Should I Do Now?


Let’s end this post with three more insightful quotes, one from Charlie Munger and the other two from Warren Buffett.

The general systems of money management [today] require people to pretend to do something they can’t do and like something they don’t. [It’s] a funny business because on a net basis, the whole investment management business together gives no value added to all buyers combined. That’s the way it has to work. Mutual funds charge two percent per year and then brokers switch people between funds, costing another three to four percentage points. The poor guy in the general public is getting a terrible product from the professionals. I think it’s disgusting. It’s much better to be part of a system that delivers value to the people who buy the product.

―Charlie Munger

“The most that owners in the aggregate can earn between now and Judgment Day is what their business in the aggregate earns.”

“When the stock temporarily overperforms or underperforms the business, a limited number of shareholders—either sellers or buyers—receive out-sized benefits at the expense of those they trade with. [But] over time, the aggregate gains made by Berkshire shareholders must of necessity match the business gains of the company.”

―Warren Buffett

Disclosure: The Little Book of Common Sense Investing was purchased by Hurricane Capital from Amazon at the retail price. If you want me to review a book, please let me know.


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