Common Sense Investing
I always seem to have my head in several books at the same time. Do other people do this? Sometimes I finish them, sometimes I don't. I have learnt not to keep going with a mediocre book. However, one that I am in right now, and that I will finish, is John Bogle’s ‘Little Book of Common Sense Investing’. John (“Jack”) Bogle founded Vanguard in the 1970s. Vanguard today has $5.1 trillion in assets under management - it's a pretty big deal in the investing world. In 1976 Bogle created the first index fund and has been a huge proponent of them ever since. This blog is not about the active/passive debate but I want to talk through a few of Bogle’s powerful ideas, because he is a man with a lot of them.
Less is more.
“For investors as a whole, returns decrease as motion increases”. This has been shown over and over again. The more you trade, the less you end up with. The problem is that human nature means that we always want to be doing something. Interest rates have gone up….I have to do something. Trump has some new idea….I have to do something. There might be a recession….I have to do something. However, as Jack Bogle writes; “Don’t do something. Just stand there.” This is one of my favourite investing quotes.
The long-term is rational, the short-term is irrational.
Over the long-term the earnings and dividends generated by businesses are almost entirely responsible for the returns delivered by the stock market. However, in the short-term returns are driven by investor emotions. Bogle writes “Even after more than 66 years in this business, I have almost no idea how to forecast these short-term swings in investor emotions.” This is why market timing is so futile. I can guarantee that if Jack Bogle can’t do it, you can’t either. I know I certainly can’t.
Bogle talks about two different games in investing – the real market and the expectations market. “The expectations market is about speculation. The real market is about investing. The stock market, then, is a giant distraction to the business of investing”. (Another one of my favourite quotes). Investors must always know what they are doing – speculating or investing. Sadly, many a fortune has been destroyed by people who thought they were investing but were only speculating. Bogle’s advice is to ignore the short-term sound and fury of the emotions reflected in our financial markets, and focus on the productive long-term economics of our corporate businesses. There is no better investing advice out there.
Keep things simple. But don’t equate simplicity with stupidity.
I have written before about how people in my industry love to over-complicate things, for the simple reason that it makes them seem smart. (If someone can’t explain something to you in simple terms, then run). I always keep things simple and adhere to Occam’s razor (cited by Bogle in his book): When there are multiple solutions to a problem, choose the simplest one. I know that simple does not mean easy. In fact, it’s really the opposite. When it comes to investing, keeping things simple requires much more thought. And thought is a good thing!
Things revert to the mean.
What does that even mean? It means that yesterday’s winners are tomorrow’s losers. Here’s how it works. Research has shown that only 14 percent of five-star funds in 2004 still held that rating a decade later. If it really was the case that we could pick out-performers by just picking yesterday’s winners, then we would expect to see funds that sat the top of the performance table in one period to be there in the next, but studies show that a tiny percentage of funds are. In fact, there are more funds at the bottom of the performance table in one period that end up in the top in the next period, than the other way round! That's mean-reversion in action.
Investing is incredibly counter-intuitive, which is what makes it so emotionally hard. This is a great example of something that doesn’t seem like it could be true. But the data and science is totally clear on this – as Jason Zweig (writer of Wall Street Journal’s “Intelligent Investor” column) says, “Buying funds based on their past performance is one of the stupidest things an investor can do.”