This past summer, I started the MPC Book Club to keep up with my financial literacy. This is a book report on The Little Book of Common Sense Investing by John C. Bogle, the book we read for October. 

As a disclaimer, this review of the book is based on my opinions alone. I think literature is like art. Because we all have a different lens or perspective, we likely each would take away different important facts from reading the same book. Also, because this book is about investing, know that I am not recommending investments based on the book.

The Little Book of Common Sense Investing was perhaps the most specific book we’ve read for the MPC Book Club. In this post, I’ll talk about the book’s clear take-aways, my favorite quotes, and detail a small experiment that I have done with investing. So, read on to learn more! 

As a disclaimer, this review of the book is based on my opinions alone. I think literature is like art. Because we all have a different lens or perspective, we likely each would take away different important facts from reading the same book. Also, because this book is about investing, know that I am not recommending investments based on the book.

The Little Book of Common Sense Investing was perhaps the most specific book we’ve read for the MPC Book Club. In this post, I’ll talk about the book’s clear take-aways, my favorite quotes, and detail a small experiment that I have done with investing. So, read on to learn more! 

3 Key Points to The Little Book of Common Sense Investing

It is clear to me that the book is promoting traditional index funds. 

Bogle believes that for everyday investors to get their fair share of stock market returns, this is the best route to go. He supports it by using statistical data, quotes of support from other investors, educators, and business people, and product comparisons (such as exchange-traded funds). 

So, what is a traditional index fund, or TIF, as they’re called in Common Sense Investing? It is a mutual fund made up of passively managed stocks. The mutual fund’s goal is to hold shares of stocks within the index it follows (i.e., S&P 500) so that investors will have returns in line with the overall market. Because the mutual fund is passively managed and not actively traded, the TIF costs are considerably lower than actively managed mutual funds.  

Investors need to minimize investment costs.

As a secondary point, the book harps on investment costs and that as everyday investors, we must be aware of their effects on our ability to grow our investments. Bogle’s message is clear: The more expensive an investment is, the lower its ability to return an amount consistent with the overall market.

It makes complete sense if you sit back and think about this for a minute, though. If the market returns 8% and your investment charges 1%, then the active manager must make at least 9% to break even. It makes us sit back and wonder: Is the additional risk worth the return?

With index funds, the fund risk is equal to the market (i.e., the fund has a beta of 1); however, with another fund, there are additional risks such as concentration risk (i.e., the manager putting too much money into one stock). Additionally, the manager may be overconfident that the investments they chose will be long-term winners when, in fact, they’re not, which is described in more detail in the book.

Finally, chasing investment returns is simply an act of futility. 

The vast majority of us are too emotional and/or don’t have enough time or interest to pick stocks that would outperform the overall market adequately. As humans, we are busy, and while we would like to think we are or could become expert investors, the research shows that there is a lot betting against us individually. Additionally, we cannot risk making money to simply lose it. 

Later in this post, I’m going to talk about an experiment. I invested in some specific stocks, and I compared the return on those stocks compared to an index fund. I had little to lose (it might have delayed our finishing our basement a bit, but we could live with that). 

When it comes to the bedrock of our wealth, we need to be somewhat confident with what we are doing. Making individual stock picks or investing in what I consider to be complicated financial products (such as leveraged or inverse ETFs, which I talked about on a Facebook Live recently) when the money is essential can be something that would keep me or others up at night. 

This book points out that active trading and complicated products aren’t necessary, and there are simple ways to put together a strong investment strategy.  

My Favorite Quotes

This book report wouldn’t be complete without some of my favorite quotes from the book: 

  • “Index funds make up for their lack of short-term excitement by their truly exciting long-term productivity.”
  • “Long-term investing serves you far better than short-term speculation.”
  • “As investors seek to outpace their peers, winners’ gains inevitably equal losers’ losses. With all that feverish trading activity, the only sure winner in the costly competition for outperformance is the person who sits in the middle of our financial system.” 
  • “Today, many of our wisest and most successful investors endorse the index fund concept; among academics, the acceptance is close to universal.” 
  • “Warren Buffett puts the moral of his story this way: for investors as a whole, returns decrease as motion increases.” 
  • The book quotes Benjamin Graham as having said, “The investor with a portfolio of sound stocks should expect their prices to fluctuate and should neither be concerned by sizable declines nor become excited by sizable advances.” 
  • “Please don’t equate simplicity with stupidity.” 
  • “On average, an astonishing 90% of actively managed mutual funds underperformed their benchmark indexes over the preceding 15 years. The index superiority was consistent and overwhelming.” 
  • “Actively managed funds come and go, but the index fund goes on forever.” 
  • “Our system of financial intermediation has created enormous fortunes for those who manage other people’s money. Their self-interest will not soon change.” 
  • “Costs make the difference between investment success and investment failure.”
  • “Most investors seem to believe that manager skill will persist. But it doesn’t. We are ‘fooled by randomness.’”

My Small Experiment on TIFs vs. Individual Stock Picking

At the beginning of the pandemic, the stock market crashed between the end of February and the beginning of April. Mark and I had some money set aside that we could take risks with, and we decided that due to the fall in the market, we thought it might be a good time to buy stock. We knew there was indeed a chance that the stock market could continue declining. Again, this was not money that we needed immediately, and what we had it set aside for was a want, not a need.

So, we invested $10,000 total in specific stocks on March 23, 2020. We put money into five different companies ranging from about $400 to $2,500 per stock. I’m not going to share what they were because I don’t want it to be misconstrued as me promoting these companies or recommending an investment in their stock. Choosing to invest in these stocks today would be very different than investing in them back in March.

I have not actively traded the account since purchasing the shares, nor have I bought more shares since the original investment. 

Today the portfolio of stocks is worth $16,683. I’m going to round this to a 60% return. That’s pretty dang good, and I’m happy with it. Now, this is as of today (Nov. 11). This return amount has fluctuated. 

Now, let’s look at if I had invested the $10,000 in a TIF. There are several TIFs. For this experiment, I’m going to use the Vanguard S&P 500 TIF as a nod to Bogle. Additionally, The S&P 500 is probably the most traditional market benchmark. Again, I am not recommending Vanguard or this specific TIF; I’m merely using it for illustrative purposes. 

So, if I had invested $10,000 in the Vanguard 500 Index Fund Investor Shares on the same date that I purchased the shares (using ending day values) and held it to today, the value of the account would be approximately $15,590 (by my calculation). Just over a 55% return on the investment. Still, no one could be upset with this type of return over eight months. 

To be honest, as I researched to write up this comparison, I’m a bit shocked that the stocks I picked outpaced the S&P 500. I was absolutely prepared to find that had I invested in the index fund, my performance would have been better. However, as is described in Common Sense Investing, this could simply be a short-term aberration. 

The book is also a reminder that I should not be overconfident that I could re-create these types of gains if I were to make investments today. 

Final Thoughts

Investing is a critical component of growing wealth over time. I like that Common Sense Investing promotes a simple, low-fee, long term investment strategy. It is time in the market, not timing the market, that counts. 

This book simplifies and supports a strategy for the individual who wants to grow wealth appropriately without taking on additional risk outside of the market’s overall risk. 

I genuinely think my experiment is flawed because of the timing of investing in such a depressed market. At the time of investing, I was genuinely looking for stocks that I thought got hit incredibly hard, given their business. 

I appreciated that Bogle’s book on common sense investing was focused on everyday investors and was supported by many individuals. The Little Book of Common Sense Investing is a great read for individuals who want to have an investment strategy that they personally oversee but don’t want to be active investment managers. 

Join the #MPCBookClub

If you liked this book report on The Little Book of Common Sense Investing, think of getting in on our real-time financial literacy discussions! The MPC Book Club is informal! Each month I choose a different financial or positive psychology book. Each Sunday night on Facebook, I post a dialogue box about the book and then I do a Live typically each Monday with thoughts I have taken away from the book. 

Join in on the discussion by following us on Facebook. I highly recommend picking up the book from your local library if you can or at your local bookstore! I’m looking forward to seeing your comments in our next MPC Book Club posts and discussions.