Pearls of investment wisdom from 'The Little Book of Commonsense Investing'

John C Bogle’s The Little Book of Commonsense Investing is one of my favourites. John C Bogle as we know launched the first index mutual fund in 1976 and it went on to become one of the largest equity funds in the world.

Mr Bogle remains a dyed-in-the-wool indexer and has been a strong advocate of cap-weighted indexing, ever since his senior thesis as a student at Princeton University more than 60 years ago.

Some wisdom from the book-these are quotes from ‘investment giants’ other than Mr Bogle-who also support passive indexing.

I believe that in principle the following words (from the book) have a universal application and hence should be understood by investors and investment advisors everywhere!

‘For the markets in total, the amount of value added, or alpha, must sum to zero. One person’s positive alpha is someone else’s negative alpha. Collectively, for the institutional, mutual fund, and private banking assets, the aggregate alpha return will be zero or negative after transaction costs.’ --Gary P. Brinson, CFA, former president of UBS Investment Management in ‘The Future of Investment Management’, Financial Analyst’s Journal, July / August 2005, Vol.61 No.4

‘A low cost index fund is the most sensible equity investment for the great majority of investors. My mentor, Ben Graham, took this position many years ago, and everything I have seen since convinces me of its truth. In this book, Jack Bogle tells you why’. -- Warren Buffet.

‘By periodically investing in an index fund, the know-nothing investor can actually outperform most investment professionals. Paradoxically, when ‘dumb’ money acknowledges its limitations, it ceases to be dumb…’--Warren Buffett

‘Market cap based indexing will never be driven from its deserved perch as core and deserved king of the investment world. It is what we should all own in theory and it has delivered low-cost equity returns to a great mass of investors…the now and forever king-of-the-hill’. --Clifford A. Asness-hedge fund manager, of AQR Capital Management in an unpublished paper called, ‘Capitalization vs. Fundamentally Weighted Indices’.

‘Toss a coin, heads and the manager will make $10,000 over a year, tails and he will lose $10,000. We run (the contest) for the first year (for 10,000 managers). At the end of the year, we expect 5000 managers to be up $10,000 each and 5000 to be down $10,000. Now we run the game a second year. Again, we can expect 2500 managers to be up two years in a row; another year 1250; a fourth one, 625; a fifth, 313 managers who made money for five years in a row. (And in 10 years, just 10 out of the original 10,000 managers). Out of pure luck…. A population entirely composed of bad managers will produce a small amount of great track records…. The number of managers with great track records in a given market depends far more on the number of people who started in the investment business (in place of going to dental school), rather than on their ability to produce profits’. --Nassim Nicholas Taleb, Fooled By Randomness, (NY, Texere, 2001)

‘Buying funds based purely on their past performance is one of the stupidest things an investor can do.’ --Jason Zweig, columnist Money magazine.

‘As a dyed in the wool indexer, of course, I believe the classic index fund must be at the core of that winning strategy. But even I would never have the temerity to say what Dr. Paul Samuelson of MIT said in a speech to the Boston Society of Security Analysts in the autumn of 2005: ‘The creation of the first index fund by John Bogle was the equivalent of the invention of the wheel and the alphabet’. Those two essentials of our existence that we take for granted every day have stood the test of time. So will the classic index fund.’ --John C Bogle

‘Well, Jack, we are wrong. You win. Settling for average is good enough, at least for a substantial portion of most investors’ stock and bond portfolios. In fact, more often than not, aiming for benchmark-matching returns through index funds assures unit holders of a better-than-average chance of outperforming the typical managed stock or bond portfolio. It’s the paradox of fund investing today: Gunning for average is your best shot at finishing above average. We’ve come around to agreeing with the sometimes prickly, always provocative, fund executive known to admirers and detractors alike as Saint Jack (Bogle): Indexing should form the core of most investors’ fund portfolios. So here’s to you, Jack. You have a right to call it, as you recently did in a booklet you wrote, The Triumph of Indexing.’ Tyler Mathisen ‘In Your Interest’ Money magazine August 1995.