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The Little Book of Common Sense Investing

I just finished The Little Book of Common Sense Investing. I learned a lot about how the stock market works, why it grows (why the economy grows), how a zero-sum game can be a winner in the long run, and much more. The arithmetic presented is simple, the logic rational, and the writing straightforward. Almost every person with an investing reputation has positive comments regarding this book.

People should read this book if they invest in the market or are interested in doing so. This book can be read by anyone - not just market junkies.

This book reinforced some of my personal financial strategies. The only way to come out ahead is long-term investing in low cost, diversified, index funds - own the market, do not try to beat it.


The winning formula for success in investing is owning the entire stock market through an index fund, and then doing nothing. Just stay the course. p106

...over the long-term, the miracle of compounding returns is overwhelmed by the tyranny of compounding costs. p85

"Remember, O Stranger, arithmetic is the first of the sciences, and the mother of safety." p78

"...let me reiterate the two basic sources of the superior returns achieved by the index fund: (1) the broadest possible diversification, eliminating individual stock risk, style risk, and manager risk, with only market risk remaining; and (2) the tiniest possible costs and minimal taxes. Together, they enable the index fund to provide the gross return earned in the stock market, minus a scintilla of cost. p296

Some simple, but not easy, advice for good investing and financial planning in general includes: diversify widely ... keep costs low ... rebalance in a disciplined fashion ... spend less ... save more ... make less heroic assumptions about future returns ... when something sounds like a free lunch, assume it is not free unless very convincing arguments are made - and then check again ... stop watching the stock markets ... work less on investing, not more ... p331

Warren Buffet puts the moral of the story this way: For investors as a whole, returns decrease as motion increases. p34

Lest we forget, let me again take you through these commonsense rules:

1. Over the long term, stock market returns are created by real investment returns earned by real businesses - the annual dividend yield on publicly held US corporations, plus their subsequent rate of earnings growth.

2. Over the short run, illusory speculative returns, caused by the impact of the change in the amount investors are willing to pay for each dollar of corporate earnings, can increase or decrease investment returns. But in the long run, the impact of speculative return washes out.

QED 1: In investing, the winning strategy for reaping the rewards of capitalism depends on owning businesses, not trading stocks.

3. Individual businesses come and go. ... The best protection for individual investors from the risks of inherent in individual stocks is the broadest possible diversification.

QED 2: Owning businesses in the aggregate through an all-market index fund is the consummate risk reduction strategy.

4. As a group, all investors in the stock market earn its gross returns.

5. While investors earn the markets entire return, they do not capture the market's entire return. ...only after the costs of financial intermediation are deducted - commissions, management fees, marketing costs, sales loads, administrative expenses, legal expenses, and custodial fees, and so on. Unnecessary taxes simply enlarge the gap.

QED 3; Gross market return, minus costs, equals net return for investors as a group.

QED 4: Gross market return, minus costs, minus timing and selection penalties, equals the net return earned by mutual fund investors as a group. p304


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