The Little Book of Common Sense Investing By John Bogle (TOP 5 LESSONS)

in the little book of common sense investing john bogle the founder of the vanguard group shows us that successful investing is all about common sense as warren buffett said it is simple but it is not easy hi welcome to the holder investor and in this video we will go over the top five lessons from the little book of common sense investing by john bogle lesson one index funds simple arithmetic suggests and history confirms that the winning strategy is to own all of the nation's publicly held businesses at a very low cost by doing so you are guaranteed to capture almost the entire return that they generate in the form of dividends and earnings growth the best way to implement this strategy is indeed simple buying a fund that holds this market portfolio and holding it forever such a fund is called an index fund the index fund is simply a basket or portfolio that holds many many eggs or stocks designed to mimic the overall performance of any financial market or market sector classic index funds by definition basically represent the entire stock market basket not just a few scattered eggs such funds eliminate the risk of individual stocks the risk of market sectors and the risk of manager selection with only stock market risk remaining like for example the s p 500 index contains the 500 bigger publicly held businesses lesson two play a winners game in the 2005 berkshire hathaway annual report warren buffett told a story about the gotrox family a wealthy family named the gotrocks owned 100 of every stock in the united states each year they reaped the rewards of investing all the earnings growth that those thousands of corporations generated and all the dividends that they distributed each family member grew wealthier at the same pace and all was harmonious their investment had compounded over the decades creating enormous wealth because the god rocks family was playing a winner's game but after a while a few fast-talking helpers arrived on the scene and they persuade some smart gothrock's cousins that they can earn a larger share than the other relatives these helpers convince the cousins to sell some of their shares in the companies to other family members and to buy some shares of others from them in return the helpers handle the transactions and as brokers they receive commissions for their services the ownership is thus rearranged among the family members to their surprise however the family wealth begins to grow at a slower pace why because some of the return is now consumed by the helpers and the family's share of the generous pie that u.s industry banks each year all those dividends paid all those earnings reinvested in the business 100 at the outset starts to decline simply because some of the return is now consumed by the helpers to make matters worse while the family had always paid taxes on their dividends some of the members are now also paying taxes on the capital gains they realize from their stock swapping back and forth further diminishing the family's total wealth the smart cousins quickly realize that their plan has actually diminished the rate of growth in the family's wealth they recognize that their foray into stock picking has been a failure and conclude that they need professional assistance the better to pick the right stocks for themselves so they hire stock picking experts more helpers to gain an advantage these money managers charge a fee for their services so when the family appraises its wealth a year later it finds that its share of the pie has diminished even further an old uncle advised the family to get rid of all their brokers get rid of all their money managers get rid of all their consultants then our family will again reap 100 of however large a pie that corporate america bakes for us year after year they followed the old uncle's wise advice returning to their original passive but productive strategy holding all the stocks of corporate america and standing pat that is exactly what an index fund does the moral of the story is for investors as a whole returns decrease as motion increases so to realize the winning returns generated by businesses over the long term the intelligent investor will minimize to the bare bones the cost of financial intermediation that's what common sense tells us that's what indexing is all about lesson three how most investors turn a winner's game into a loser's game how much do the costs of financial intermediation matter hugely in fact the higher costs of equity funds have played the determinative role in explaining why fund managers have lagged the returns of the stock market so consistently for so long when you think about it how could it be otherwise by and large these managers are smart well-educated experienced knowledgeable and honest but they are competing with each other when one buys a stock another sells it there is no net gain to fund shareholders as a group in fact they incur a loss equal to the transaction costs they pay to those helpers investors pay far too little attention to the costs of investing let's assume the stock market generates a total return averaging eight percent per year over half a century now let's assume that the costs of the average mutual fund continue at their present rate of at least 2.5 percent per year based on these assumptions let's look at the returns earned on 10 000 over 50 years the simple investment in the stock market grows to 469 000 a remarkable illustration of the magic of compounding returns over an investment lifetime by the end of the long period the value accumulated in the fund totals just 145 400 an astounding shortfall of three hundred twenty three thousand six hundred dollars to the cumulative return earned in the market itself the investor who put up one hundred percent of the capital and assumed one hundred percent of the risk earned only thirty one percent of the market return the system of financial intermediation which put up zero percent of the capital and assumed zero percent of the risk essentially confiscated seventy percent of that return lesson four profit from the majesty of simplicity if low costs are good and i don't think a single analyst academic or industry expert would disagree that low costs are good why wouldn't it be logical to focus on the lowest cost funds of all index funds that own the entire stock market several index funds carry expense ratios as low as 0.10 percent or even less and incur turnover costs that turn out to be zero standard and poor's corporation now compares index returns with actual returns achieved by active managers in many us market segments and the results are unmistakable over the past five years alone the s p 500 index has outpaced 67 percent of large cap general equity funds well the s p mid cap 400 index has outperformed 84 of mid cap funds and the s p small cap 600 index has outperformed 79 of all small cap funds while it is alleged that indexing doesn't work in markets that are less efficient than the large stocks in the s p 500 the impressive performance of the small and mid cap indexes suggest that it works perfectly well also the s p international index world markets less u.s stocks outpaced 80 percent of actively managed international equity funds over the past five years similarly the s p emerging markets index outpaced 88 of emerging market funds lesson five reversion to the mean yesterday's winners tomorrow's losers in selecting mutual funds most fund investors seem to rely not on sustained performance over the long term but on exciting performance over the short term studies show that 95 percent of all investor dollars flow to funds rated four or five stars by morningstar the statistical service most broadly used by investors in evaluating fund returns how successful are fund choices based on the number of stars awarded for such short-term achievements not very according to investment analyst mark hulbert a mutual fund portfolio continuously adjusted to hold only morningstar's five-star funds earned an annual return of just 6.9 percent between 1994 and 2004 nearly 40 percent below the 11.0 percent return on the total stock market index to make matters worse according to halbert these highly rated funds were assuming even more risk than the market average monthly volatility and asset value sixteen percent for the funds compared with fifteen 15 for the stock market the message is clear avoid performance chasing based on short-term returns especially during great bull markets a mutual fund or active management etf that is having a good performance in a bull market for a short period of time might not sustain and even lose these gains in the long run statistics say they will to get the compound returns of the stock market you have to hold your investments at low costs for the long run however sometimes it is difficult to do so because of our behavior bias in the book the psychology of money morgan housel shows us how to deal with investments from the psychology point of view this is very important to succeed in the long run you can check out the summary of this book in the description below please click on the like button and subscribe to receive the next videos this will help me a lot thank you for watching see you in the next video

Channel: The holder investor

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Keywords: the little book of common sense investing, the little book of common sense investing summary, john bogle, Warren Buffet, index funds, ETF, ETFs, Gotrocks Family, Mutual Funds, Mutual Fund, reversion to the mean, Value investing, Stock market, How to start investing, passive income, how to invest, investing for beginners, how to invest in stocks, investing strategies, The Holder Investor, vanguard group, stock market, the little book of common sense investing by john bogle

Id: KRs3IwbzI7A

Length: 10min 6sec (606 seconds)

Published: Sun Nov 07 2021