book intends to show you why you should stop contributing to the croupiers of the financial markets. Why? Because during the past decade they have raked in something like $565 billion each year from you and your fellow investors. It will also tell you how easy it is to avoid those croupiers: Simply buy a Standard & Poor’s 500 Index fund or a total stock market index fund. Then, once you have bought your stocks, get out of the casino – and stay out. Just hold the market portfolio forever. And that’s what the traditional index fund does.
This investment philosophy is not only simple and elegant. The arithmetic on which it is based is irrefutable. But it is not easy to follow its discipline. So long as we investors accept the status quo of today’s crazy-quilt financial market system, so long as we enjoy the excitement (however costly) of buying and selling stocks, and so long as we fail to realize that there is a better way, such a philosophy will seem counterintuitive. But I ask you to carefully consider the impassioned message of this Little Book. When you do, you too will want to join the index revolution and invest in a new, “more economical, more efficient, even more honest way,”4 a more productive way that will put your own interests first.
It may seem farfetched for me to hope that any single book could ignite the spark of a revolution in investing. New ideas that fly in the face of the conventional wisdom of the day are always greeted with doubt and scorn, even fear. Indeed, 240 years ago, the same challenge was faced by Thomas Paine, whose 1776 tract Common Sense helped spark the American Revolution. Here is what Tom Paine wrote:
Perhaps the sentiments contained in the following pages are not yet sufficiently fashionable to procure them general favor; a long habit of not thinking a thing wrong, gives it a superficial appearance of being right, and raises at first a formidable outcry in defense of custom. But the tumult soon subsides. Time makes more converts than reason… I offer nothing more than simple facts, plain arguments, and common sense.
As we now know, Thomas Paine’s powerful and articulate arguments carried the day. The American Revolution led to our Constitution, which to this day defines the responsibilities of our government and our citizens, the very fabric of our society.
Similarly, I believe that in the coming era, my own simple facts, plain arguments, and common sense will carry the day for investors. The Index Revolution will help us build a new and more efficient investment system for our nation, a system in which serving investors is its highest priority.
Some may suggest that, as the creator both of Vanguard in 1974 and of the world’s first index mutual fund in 1975, I have a vested interest in persuading you of my views. Of course I do! But not because it enriches me. It doesn’t earn me a penny. Rather, I want to persuade you because those two rocks on which Vanguard was founded all those years ago – our truly mutual, fund-shareholder-owned structure and our index fund strategy – will enrich you over the long term.
In the early years of indexing, my voice was a lonely one. But there were a few other thoughtful and respected believers whose ideas inspired me to carry on my mission. Today, many of our wisest and most successful investors endorse the index fund concept; among academics, the acceptance is close to universal. But don’t take my word for it. Listen to these independent experts who have no ax to grind except for the truth about investing. You’ll hear from some of them at the end of each chapter.
Listen, for example, to this endorsement by the late Paul A. Samuelson, Nobel laureate in economic sciences and professor of economics at the Massachusetts Institute of Technology, to whose memory this book is dedicated: “Bogle’s reasoned precepts can enable a few million of us savers to become in twenty years the envy of our suburban neighbors – while at the same time we have slept well in these eventful times.”
It will take a long time to fix our financial system. But the glacial pace of that change should not prevent you from looking after your own self-interest. You don’t need to participate in its expensive foolishness. If you choose to play the winner’s game of owning shares of businesses, and to refrain from playing the loser’s game of trying to beat the market, you can begin the task simply by using your own common sense, understanding the system, and eliminating substantially all of its excessive costs.
Then, at last, you will be guaranteed to earn your fair share of whatever returns our businesses may be generous enough to deliver in the years ahead, reflected as they will be in our stock and bond markets. (Caution: You’ll also earn your fair share of any interim negative returns.) When you understand these realities, you’ll see that it’s all about common sense.
When the first edition of The Little Book of Common Sense Investing was published 10 years ago, my hope was that investors would find it useful in helping them to earn their fair share of whatever returns – positive or negative – our financial markets deliver.
That original Little Book of 2007 was a direct successor to my first book, Bogle on Mutual Funds: New Perspectives for the Intelligent Investor, published in 1994. Both books set forth the case for index investing, and both became the best-selling mutual fund books ever, with investors purchasing a combined total of more than 500,000 copies.
During the near quarter-century since the publication of my first book, index funds have come into their own. Assets of equity index funds have risen 168-fold, from $28 billion to $4.6 trillion in mid-2017. In the past decade alone, U.S. investors have added $2.1 trillion to their holdings of equity index funds and withdrawn more than $900 billion from their holdings of actively managed equity funds. Such a huge $3 trillion swing in investor preferences surely represents no less than an investment revolution.
In retrospect, it seems clear that my pioneering creation of the first index mutual fund in 1975 provided the spark that ignited the index revolution. And it also seems reasonable to conclude that my books, read by an estimated 1.5 million readers, played a major role in fueling the extraordinary power of the revolution that followed.
The creative destruction reaped by index funds has, by and large, served investors well. As you read this 10th Anniversary Edition of The Little Book of Common Sense Investing, you’ll see that it stands firmly behind the sound principles of its predecessors, with new chapters on dividends, asset allocation, and retirement planning focused on the implementation of those principles.
Learn! Enjoy! Act!
Valley Forge, Pennsylvania
September 1, 2017
Charles T. Munger, Warren Buffett’s business partner at Berkshire Hathaway, puts it this way: “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 2 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.”
William Bernstein, investment adviser (and neurologist), and author of The Four Pillars of Investing, says: “It’s bad enough that you have to take market risk. Only a fool takes on the additional risk of doing yet more damage by failing to diversify properly with his or her nest egg. Avoid the problem – buy a well-run
“Economical,” “efficient,” and “honest” are the words I used in my 1951 Princeton University thesis, “The Economic Role of the Investment Company.” Some principles are eternal.
