The Little Book of Common Sense Investing

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🎯 The Book in 3 Sentences

💡 Key Takeaways

Be aware of fees, costs, and taxes.
Index funds are efficient at the above.
Don’t select equity funds based on their long-term past performance.
Whether markets are efficient or not, indexing works.
Achieving satisfactory investment results is easier than most people realize.
No matter what happens, stick to your program. Think long-term.
Patience and consistency are the most valuable assets for the intelligent investor. “Stay the course”.

✏ Top Quotes

The index fund eliminates the risks of individual stocks, market sectors, and manager selection. Only stock market risk remains.

In the game of investing, the financial croupiers always win, and investors as a group lose. After the deduction of the costs of investing, beating the stock market is a loser’s game.

The greatest Enemies of the Equity investor are Expenses and Emotions.

Whether your assets are great or humble, diversify, diversify, diversify in a portfolio of stocks and bonds. Then, only market risk remains.

📝 Summary + Notes

Chapter Two Rational Exuberance

Accurately forecasting short-term swings in investor emotions is not possible.
But forecasting the long-term economics of investing has carried remarkably high odds of success.

Chapter Three Cast Your Lot with Business

Owning the stock market in the long term is a winner’s game, but attempting to beat the market is a loser’s game.
96% of funds can’t beat S&P 500.

Chapter Four How Most Investors Turn a Winner’s Game into a Loser’sGame

Costs make the difference between investment success and investment failure.

Chapter Nine When the Good Times No Longer Roll

Tempting options for improving your investment returns:
- Select a very low-cost index fund that simply holds the stock market portfolio.
- Select funds with rock-bottom costs, minimal portfolio turnover, and no sales loads.

Chapter Ten Selecting Long-Term Winners

The odds against success are terrible: Only 2 out of 355 funds have delivered truly superior performance.

Chapter Thirteen Profit from the Majesty of Simplicity and Parsimony

Do your best to diversify to the nth degree, minimize your investment expenses, and focus your emotions where they cannot wreak the kind of havoc that most other investors experience.
Rely on your own common sense.
Emphasize an S&P 500 Index fund or an all-stock-market Index fund.
Carefully consider your risk tolerance and the portion of your investments you allocate to equities.
Then, stay the course.

Chapter Fourteen Bond Funds

Rational expectations suggest that future returns both on stocks and on bonds are almost certain to fall well short of historical norms.
The first total bond market index fund—formed in 1986, and still the largest—tracks the Bloomberg Barclays U.S. Aggregate Bond Index.
During the past 10 years, that total bond market index fund earned an annual return of 4.41%.
The reality is that the value of bond index funds is derived from the same forces that create value in stock index funds: broad diversification, rock-bottom costs, disciplined portfolio activity, tax efficiency, and focus on shareholders who place their trust in long-term strategies.

Chapters Eighteen-Nineteen Asset Allocation

Your ability to accept risk and your willingness to accept risk constitute your risk tolerance.
Stock/Bond allocation from 75/25 to 25/75 ranges depending on age and risk tolerance.
For investors who have a very long time horizon, and considerable grit and guts—investors who have the courage to be unintimidated by periodic market crashes—clearly an allocation of 100 percent to the S&P 500 Index fund would nearly always be the better choice.

Chapter Twenty Investment Advice That Meets the Test of Time

Start to invest at the earliest possible moment, and continue to put money away regularly from then on.
Investing entails risk. But not investing dooms us to financial failure.
Costs matter, overpoweringly in the long run, and we know that we must minimize them.
Taxes matter, and they, too, must be minimized.
Neither beating the market nor successfully timing the market can be generalized without self-contradiction. What may work for the few cannot work for the many.