Common Sense on Mutual Funds

 Bogle's book is the second recommendation in Bernstein's Bernstein's If You Can...., as a basic introduction to investing.

This book is a slog.

21 hours by audio book. Next time I might stick with a paper copy.

Regardless, I will highly recommend this book as worthy of great perseverance. My experience of the first dozen chapters is shaded by years of reading the opinions, experiences, philosophy and calculations of Bogleheads. I reached a turning point, learned something new and exciting, and by the end was utterly delighted by the clarity and determination of Bogle's ethical underpinnings. The nuggets of wisdom and clarity throughout culminate in a straightforward commentary on leadership, humanity and philosophy. 

After 3 hours of listening, I was convinced that the focus of the book is the investor's inability to predict the market, with the associated importance of long-term investment. Bogle includes example after example to hammer these points home.

Transitioning via the Talmud's recommendation to "...always keep... wealth in three forms: one third in real estate, another in merchandise, and the remainder in liquid assets," Bogle addresses asset allocation. He first argues that investment policy is the key factor in explaining variation among investment portfolios (research: pension funds, variation over quarters). However, costs and fees significantly affect the investor's long-term yields. "Investors owning all stocks in a given market will achieve the market's gross return before the deduction of the costs of investing." Once those costs are deducted, proceeds lag behind the gross return.

Much of the book reads as an argument for indexing, minimization of costs and thoughtful consideration of the balance between risk and return with the key caveat that increased risk does not actually produce consistently greater return. After a thorough review of bonds and almost 9 hours of listening, I gave up on the audio book. Those 21 hours were damming my flow of books and hindering both my reading and study time.

In the midst of the comparisons of returns, analysis of academic studies, and demonstrations of the "tyranny" of fees, Bogle describes target date retirement funds as "funds of funds", which are apparently generally less risk-averse than most rule-of-thumb investors. This is new and interesting, and I will have to look at the target date fund options that I have used (and mainly discarded) in the past. They seemed like they should be a good idea, yet were somewhat complex and opaque compared to sector-focused index funds.

Despite my overall frustration with the length of the book, which continued to blockade reading list progress, I was happy to see that Bogle addressed portfolio size. Within this section, he pithily inserts highly generalizable wisdom:

(1) short-term strategies are more costly to implement than long-term strategies; (2) momentum trades are more costly than trades based on fundamentals; (3) information-sensitive trades (based on purported market knowledge) are more costly than informationless trades (i.e., index fund transactions); and (4) aggressive trades made with speedy execution as the goal are more costly than opportunistic (contrarian) trades. 

Chapter 13 was particularly high-yield. This chapter reviews the effect of taxes on investment yields. I had not realized that tax-efficient, long-term funds exist. This chapter is worth reviewing and researching.

To close the book, Bogle focuses on personal experience. He describes the inception and trajectory of his career and of Vanguard. I do note his admission that he founded Vanguard in the midst of one depression and recognizes growth commensurate with the market. He delves into his perspective on leadership, arguing the importance of readiness, foresight, purpose, passion, service, failure, persistence, patience and courage. From Chapter 21:
"I too have come to regard passion, the fourth trait that I cite, as one of the central characteristics of leadership. A flamboyant display of passion is hardly necessary; a quiet passion that brooks no doubt about its intensity is equally adequate, perhaps even better."

Bogle's final chapters on humanity and on the effects of good governance are frankly inspirational and highly rewarding. The book is worth reading just to be able to appreciate these chapters in context, and then probably worth rereading with these chapters as background. It will be a while before I read it again, but this book may end up in paper on my wooden shelves so I have the opportunity.