Sunday, March 18, 2007

A Reveiw of Bogle's "Little Book"

So here is the review. First, so that I do not error, here is the book description from the publisher:

"To learn how to make index investing work for you, there’s no better mentor than legendary mutual fund industry veteran John C. Bogle. Over the course of his long career, Bogle—founder of the Vanguard Group and creator of the world’s first index mutual fund—has relied primarily on index investing to help Vanguard’s clients build substantial wealth. Now, with The Little Book of Common Sense Investing, he wants to help you do the same.

Filled with in-depth insights and practical advice, The Little Book of Common Sense Investing will show you how to incorporate this proven investment strategy into your portfolio. It will also change the very way you think about investing. Successful investing is not easy. (It requires discipline and patience.) But it is simple. For it’s all about common sense.

With The Little Book of Common Sense Investing as your guide, you’ll discover how to make investing a winner’s game:

  • Why business reality—dividend yields and earnings growth—is more important than market expectations
  • How to overcome the powerful impact of investment costs, taxes, and inflation
  • How the magic of compounding returns is overwhelmed by the tyranny of compounding costs
  • What expert investors and brilliant academics—from Warren Buffett and Benjamin Graham to Paul Samuelson and Burton Malkiel—have to say about index investing

About the Author: JOHN C. BOGLE is founder of the Vanguard Group, Inc., and President of its Bogle Financial Markets Research Center. He created Vanguard in 1974 and served as chairman and chief executive officer until 1996 and senior chairman until 2000. In 1999, Fortune magazine named Mr. Bogle as one of the four "Investment Giants" of the twentieth century; in 2004, Time named him one of the world’s 100 most powerful and influential people, and Institutional Investor presented him with its Lifetime Achievement Award.

My two cents:

Bogle Maintains:
  1. Mutual fund investors are bound to lose (and in most cases you pay the fund manager outrageous sums to lose you money)
  2. Most investor are ill-equipped to pick individual stocks
  3. Index funds are the best way for the average person to invest in the market and reap the full benefits of the US economy.
I have some agreement and disagreements with him. I strongly agree that entrusting your money to 90% (maybe more) of mutual fund managers is a losing game long term. Some facts from the book:

  1. Between 1994 and 2004 Morningstar 5 Star (Top Rated) Funds returned 6.9% annually vs 11% for the Total Market
  2. After the market bubble of 1997-1999, the "Top 10" funds from those years plummeted. From 2000-2002, not a single one was ranked higher than 790 and they were outperformed by 95% of their peers.
  3. From 1982-1992, the top fund in each year averaged a ranking of 285 the following year.
  4. From 1995-2005 the top fund in each year averaged a ranking of 619 the following year
  5. Of the 1,400 mutual funds out there, in the last 40 years, only 1 has beaten the market for 15 consecutive years (and that streak just ended in 2006) Legg Mason Value run by Bill Miller.

That being said, if you do not want to do the homework but want to own stocks, index funds are the way to go. A caveat, there has been an explosion of these funds in the past 3 years and you can now buy an index fund for almost anything. If you truly want to mirror the results of the overall market, your only choice is an S&P index fund.

Personally, I strongly believe (and have been able to) that beating the market with individual stock picks is something people can do and you do not have to have an MBA or Harvard education to do it. According to Buffet, when it comes to investing "The business schools reward difficult complex behavior more than simple behavior, but simple behavior is more effective".

Picking stocks is not all that difficult, people just make so.

Another Buffetism: referring to investing, "there seems to be a perverse human characteristic that needs to take simple things and make them difficult."

We all have it in us to be successful investors, if you do not want to try, or do not have the time to dedicate to doing the necessary homework, do yourself a favor, spend the $11 for Bogle's book (click on the link above, you can read it in a weekend and it is written for the novice investor), dump all your mutual funds and put your money into index funds.....

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