When Jack Bogle passed away earlier this year, the industry lost a visionary who, in the words of Warren Buffett, “helped millions of investors realise far better returns on their savings than they otherwise would have earned.” 

Refusing to believe the stock market is the preserve of professionals, Bogle launched the first index fund for ordinary investors. He championed the idea that instead of trying to beat an index, a fund should mimic its performance, aiming for higher returns in the long run, but with lower costs.

A key innovation at the time, Bogle left behind many ideas that make good sense today. He also left behind his Little Book of Common Sense Investing, which we’ll explore here. If you only read one book about investing then make it this one.

What makes it great, in a nutshell?

‘The Little Book of Common Sense Investing – The Only Way to Guarantee Your Fair Share of Stock Market Returns’, was first published in 2007, by which time Bogle had been retired for almost a decade. Coming so late in his career it brings together the experience of a life spent refining the key themes of his approach to investing – that beating the market is a hiding to nothing and wise investors should concentrate on time in the market.

Working through the book

The book sets out its stall in the introduction – ‘Don’t Allow a Winner’s Game to Become a Loser’s Game’ in which Bogle states that arithmetic and history show the winning strategy is to own all the nation’s publicly held businesses at very low cost. He treats us to a parable, actually co-opted from Warren Buffett, about a wealthy and extensive family called the Gotrocks.

With thousands of family members the Gotrocks own 100% of every stock in the United States. Each year they reap growth and dividends, compounding their wealth over the decades. When some ‘helpers’ convince them they can earn more by buying and selling shares (for a fee of course) they take them up on the offer. The Gotrocks’ wealth accumulation starts to slow as the helpers take their slice and they pay taxes on capital gains from all the stock swapping.

Since the helpers aren’t really helping, the Gotrocks seek advice on how to pick stocks properly. More experts come with more fees and soon consultants are involved too, to explain why returns are dwindling (also for a fee). Only now does the penny drop, as it were.

In short, Bogle’s message is “Go back to square one. Get rid of all your brokers. Get rid of all your money managers. Get rid of all your consultants.”

The myth of ‘beating the market’

Bogle reinforces the message that trying to beat the market doesn’t work and that ‘The Relentless Rules of Humble Arithmetic’ will win out in the end. He looks at the records of 355 equity funds since 1970, finding 223 have gone out of business, while another 60 underperformed the S&P 500 by more than a percentage point each year.

Of the remaining funds, just 24 managed to outpace the market and for 15 of those, the margin over the S&P 500 was less than two percentage points per year – which may be down to skill or luck. For the remaining nine, six performed best while they were small, leaving just three that Bogle would describe as long-term winners.

The math will never let you down

With the Little Book of Investment Common Sense, Bogle distils his long-standing (and well-proven) ideas in a way that’s engaging, easy to follow and ideally, best read at the beginning of one’s investment career.

While he clearly believes in his approach, he also points out that the idea of safety-first can be exhausting, especially for those who want a little excitement from the investment experience. For this he suggests a ‘funny money’ account – one that fences off “not one penny more than 5 percent of your investment assets” – enough to experiment and learn with, but not so much that you can’t afford to lose it.

He wraps up with a helpful list of things that we can know in investment and the things that we can never know, summing it up as follows – “For all the inevitable uncertainty amidst the eternally dense fog surrounding the world of investing, there remains much that we do know”.

As he said more than once in his long career, “The math will never let you down.”