If asked who the world’s most successful investor is, many people might name Warren Buffett. Yet there’s another person who has changed the investments world more than anyone else. His name is John C Bogle.
Founder of the world’s second-largest mutual funds company, Vanguard, Bogle transformed fund management by starting the first index mutual fund in the mid-1970s.
Instead of trying to be clever and beat the market, the fund simply tracks the performance of the broader share market over the longer run. And Vanguard at the time of writing manages $4.2 trillion for millions of investors.
It would seem that being boring and cheap can turn out to be more important than being clever. We went through Bogle’s 2007 guide, The Little Book of Common Sense Investing, for a few other pearls of wisdom. And here they are.
1. Don’t look for the needle in the haystack
Just buy the haystack. This is possibly the most important thing he’s ever said and sums up the entire passive investment philosophy. Instead of looking for the top-performing stock (the needle), as investors, you should buy the entire industry, index or asset class (the haystack).
In his view, this approach is likely to deliver much better returns than the average actively-managed portfolio.
2. Trying to beat the market is a loser's game
If you want to play the share market, you’ll want to win. Yet a preference for doing something and taking action, rather than doing nothing, can wreak havoc with finances. Bogle writes that trying to outperform the market is a zero-sum game – because one person’s gain will be another’s loss.
And trying to beat the market after costs are taken into account is a loser’s game because it’s simply not possible.
3. The more managers and brokers take, the less investors make
Bogle believes investors should consider the added cost of advice or guidance carefully, because even a small increase in fees can have a large effect. For 20 years, only a quarter of actively-managed US equity funds outperformed their relative benchmarks.
He says: “Your index fund should not be your [fund] manager’s cash cow; instead, it should be your own cash cow.”
4. Your greatest enemies are emotions and expenses
This advice seems pretty clear: ignore the short-term noise of emotions typically reflected in the ups and downs of financial markets. False expectations – such as that a rising stock will continue to rise or that a loss-making stock is bound to rebound eventually – are common thinking traps.
Another problem emotions can cause is when we do not want to accept we’ve made a loss, and refuse to take that on board.