Right Attitudes

Ideas for Impact

Personal Finance

Book Summary of John Bogle’s ‘Little Book of Common Sense Investing’

By Leave a Comment

The Little Book of Common Sense Investing, John Bogle “In investing, the winning strategy for reaping the rewards of capitalism depends on owning businesses, not trading stocks,” argues John Bogle in making a strong case for low-cost index funds in his text, “The Little Book of Common Sense Investing.” With statistics and graphs, Bogle rationalizes that low-cost index funds outperform most investment professionals and offer better-than-average returns for investors over the long term.

John Bogle is the legendary founder of the investor-owned Vanguard Group, currently the world’s largest mutual fund company by total assets under management. Over the course of 25 years at the helm of Vanguard, until his retirement in 1999, he focused the efforts of Vanguard on offering cost-conscious investment choices to the masses. John Bogle is the bestselling author of many other books on investment advice.

Superiority of Low-Cost Index Funds

John Bogle founded the world’s first index mutual fund, the Vanguard 500 Index Fund in 1975. Since then, “Saint Jack” (as critics labeled Bogle mockingly) has untiringly promoted the virtues of low-fee, no-load, low-turnover, passively-managed index (or more precisely, index-tracking) mutual funds. Investing in such funds, he contends in “The Little Book,” is the simplest and most effective way to invest in a diversified portfolio of stocks and bonds, and profit from earnings growth of businesses and the dividends they yield.

John Bogle methodically discusses every theme relevant to successful investing: the myths of speculation and market timing, inflation, frictional costs (fees charged by brokers and investment advisors, costs of transactions, front-end and back-end loads,) and the effects of compounding and taxes. He then convincingly counters arguments against investing in total market index funds through easy-to-follow quantitative appraisals of investing in individual stocks and bonds, actively managed funds, hedge funds, and sector-specific funds. At the end of each chapter, Bogle reinforces his position with words of wisdom from some of the greatest minds in economics and investing: Ben Graham, Warren Buffet, John Maynard Keynes, Peter Lynch, and the like.

Invaluable Insights for Investors

The majority of people do not have the time, energy, determination, or aptitude for understanding economics, examining investments, managing risk, and building wealth for themselves. They are either overly cautious, or they invest heedlessly, submit to market trends, or engage in speculation. In reading John Bogle’s authoritative book, modest investors will recognize that low-cost index funds offer them broad diversification, reasonably good returns over the long-term, and the ability to outperform a majority of investment professionals.

Informed investors will find, notwithstanding many drawn-out discussions, a great reiteration of John Bogle’s now-familiar, commonsensical ideas on the merits of index investing.

Leadership Reader’s Bottom-line

Wondering what to read next?

  1. The Extra Salary You Can Negotiate Ain’t Gonna Make You Happy
  2. The Problem with Modern Consumer Culture
  3. Is Day Trading and Speculation for You?
  4. You are Rich If You Think You Have Enough
  5. Wealth and Status Are False Gods

The Easier Way to Build Wealth

By Leave a Comment

“Work a lot, spend a little, save the difference, invest it wisely, leave it alone. It’s not that hard. We just make it harder than it needs to be. Paying too much attention to the details of markets is a chief culprit.”
— Morgan Housel in Motley Fool

It is amazing that most people just do not seem to accumulate enough wealth despite making a comfortable living. Many live from paycheck to paycheck, even with steadily rising incomes. Borrowers often fall behind on their mortgage payments. Credit card and consumer debt is growing at an alarming pace. Employees in the prime of their lives are not setting aside anything significant for retirement. As a result, many baby boomers cannot stop working at the usual retirement age because they are not ready to fund the rest of their lives.

Every Dollar You Make Equals LESS than a Dollar for You to Spend

Are you sometimes disappointed at not realizing your dreams of building wealth or becoming financially secure? The overwhelming odds are that at the root of your feeling of financial insufficiency is how you tend to spend.

A common folly is to assume that every dollar you make equates to a dollar you can spend. In reality, you need to make much more than a dollar to spend each dollar. Apply the following some simple arithmetic to calculate the true purchasing power of your income.

  • Suppose that you are employed in the United States and you are in the 28% tax bracket. If you pay 6.2% in Social Security deductions, 1.45% in Medicare deductions, and your state income tax rate is 4%, then your total deductions are 39.65% of your income. On every $1 you earn, you pay $0.3965 in deductions. Therefore, for every $1 you make, your purchasing power is just $0.6035. In other words, you have to earn $1.65 (1.65 = 1/0.6035) to spend every $1. For instance, you would have to earn $3,811 to buy a 47″ flat screen TV that costs $2,300.
  • When you invest your money, you do not pay Social Security or Medicare deductions on dividends and capital gains. If the tax rate on long-term gains and dividends is 15% and your state income tax rate is 4%, you will retain $0.81 of every $1 you make in long-term gains and dividends. Even then, you have to earn $1.23 in dividends and capital gains to spend $1.

Harness Your Purchasing Power

“Anything you do to make yourself more valuable will pay off in real purchasing power.”
—Warren Buffet

There are only two ways to get rich: make more money and spend less. The first method is relatively difficult: it is never easy to get a significant raise or a better job at a better place, win the lottery, take a second job, sustain a secondary source of income, or consistently make sizeable gains in the capital markets. It is easier to build some discipline in your spending habits.

  • Track all your expenses for a month. At the end of the month, analyze your cash flow. Scrutinize your expenses in terms of ‘wants’ and ‘needs.’ Happiness comes from matching your wants to your needs. Consider ideas for cutting costs and their consequences. Examine your discretionary spending. Scale down or dispose of unnecessary services or subscriptions, irrelevant utilities and features. Consider reprioritizing your expenditures with a medium- and long-term perspective.
  • Examine your spending instincts. Be mindful of the perils of consumerism and materialism. Do not let your rising income fuel increased spending. Simplify your life.
  • A one-time windfall, bonus, or tax refund is no excuse for indulgent spending. Be selective in your purchases without abandoning your plans for paying off debt, saving money or funding your retirement account.
  • Seek to be disciplined and prudent, not necessarily thrifty or frugal. Cultivate an appropriate financial discipline without hurting the quality of your life. Reward and treat yourself for your achievements. Invest in anything that makes you feel good, happy, or helps you realize your goals.

Wondering what to read next?

  1. Yes, Money Can Buy Happiness
  2. The Extra Salary You Can Negotiate Ain’t Gonna Make You Happy
  3. The Problem with Modern Consumer Culture
  4. You are Rich If You Think You Have Enough
  5. Wealth and Status Are False Gods

The Eight Guiding Principles of Successful Investors

By Leave a Comment

Eight guiding principles for successful investing in personal finance

“Success in investing doesn’t correlate with I.Q. once you’re above the level of 25. Once you have ordinary intelligence, what you need is the temperament to control the urges that get other people into trouble in investing.”
* Warren Buffett

I have invested in stock markets since I was sixteen. Largely, I have been quite a successful investor, if you disregard the current slump in the financial markets. Over the years, primarily though my mistakes, I have learnt several invaluable lessons that have shaped my personal investing philosophy. Here is a summary.

  1. Do not invest money you cannot afford to lose. Know your limitations and own a mix of asset classes that are just right for you. Understand your ability to tolerate the hurts of losing money.
  2. Personal finance » Buying a stock is the easy part. Knowing when to sell is difficult. Buying a stock is the easy part. Knowing when to sell, especially in the case of hot stocks, is challenging. Do ample research before buying stocks or mutual funds. Establish a few criteria for selling and have the discipline to sell when a stock meets your criteria.
  3. Invest; do not speculate. You cannot try to outsmart the market by trying to time the market or day trade. You cannot be right on every trade and every stock that you lay hands on—research has shown that even the best investors are right in about five of every eight stock purchases.
  4. Do not fret about missing an opportunity. Opportunities abound in every market—bull or bear, short-term or long-term.
  5. Do your own research. Stock research is indeed hard work, yet indispensable. Monitor stocks frequently. Pay attention to price-to-earning ratio (PE,) price-to-earning-to-growth ratio (PEG,) revenues and cash flow. Learn how to read company balance sheets and other financial statements.
  6. Follow each company’s fundamentals carefully. Consider vital changes to the company’s operations, competitive landscapes, and industry prospects. Pay attention to macro-economic factors that may influence the industry.
  7. Financial markets » Be skeptical of too much optimism and hype. Be skeptical of too much optimism and hype. Do not pursue past performance and buy a stock or mutual fund, possibly after a period of high returns. Watch out for stock analysts and investment advisors touting stocks after good news and playing down stocks that have already fallen. Understand that financial advisors may promote mutual funds that pay them high commissions and not necessarily get better returns for you.
  8. Never lose sleep over your investments. Never let your emotions guide your investments transactions. Money is, after all, not the most important thing in your life.

Wondering what to read next?

  1. The Extra Salary You Can Negotiate Ain’t Gonna Make You Happy
  2. Book Summary of John Bogle’s ‘Little Book of Common Sense Investing’
  3. Maximize Income, Not Savings
  4. The Problem with Modern Consumer Culture
  5. You are Rich If You Think You Have Enough