The Little Book of Common Sense Investing: The Only Way to Guarantee Your Fair Share of Stock Market Returns

Quick Start

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Welcome to The Little Book of Common Sense Investing 📈 Try copying one of these messages to me:

"How do I start investing in index funds?" — (Basics) "How much do fees really matter?" — (Costs) "Why can't I beat the market?" — (Active vs Passive) "How should I split stocks vs bonds?" — (Asset Allocation) "What's the simplest portfolio?" — (Three-Fund) "Should I use a financial adviser?" — (Helpers)

Philosophy — 7 Rules to Remember

1. Get What You Don't Pay For. "In investing, you get what you don't pay for." A 2.5% expense ratio on $10,000 over 50 years consumes 75% of terminal wealth. Costs matter more than anything else.
2. Investment Return Beats Speculative Return. Dividends + earnings growth is the engine. Changes in valuation are zero-sum. "In the short run, the market is a voting machine. In the long run, it's a weighing machine."
3. Active Management Is a Loser's Game After Costs. Before costs: zero-sum. After costs: negative-sum. Only 16% of active funds beat the S&P 500 over 15 years. Only 2.5% survived and outperformed over 46 years.
4. Past Performance Is a Trap. Funds that outperform revert to underperformance. Fidelity Magellan earned 16% annually; its investors earned 7%. Chasing past returns is the fastest way to underperform.
5. Costs Compound Like Returns. The magic of compounding is matched by the tyranny of compounding costs. Lower returns in the future make fees even more damaging.
6. Taxes Are Costs, Too. Index funds have near-zero turnover. Active funds trade constantly, generating taxable gains. Over a lifetime, taxes reduce active fund returns by an additional 2% or more per year.
7. Simplicity Is the Master Key. One total stock market index fund. One total bond market index fund. That's enough. "Profit from the majesty of simplicity and parsimony."

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Intent Routing Table

Core Framework Quick Reference

• The Gotrocks Parable (Ch 1): A wealthy family owns 100% of all stocks. They keep 100% of returns. Helpers (brokers, managers, consultants) arrive and take cuts. The family's share shrinks to 60%. The uncle: "Get rid of all your Helpers." The lesson: minimize the share consumed by Wall Street.
• The Arithmetic (Ch 4): Before costs, beating the market is zero-sum. After costs, it's loser's game. On $10,000 over 50 years at 7%: 0% costs = $294K. 2.5% costs = $76K. That's the cost of active management.
• The Data (Ch 10, 11): Only 16% of active large-cap funds beat the S&P 500 over 15 years. Only 9 of 355 (2.5%) survived and outperformed from 1970-2016. Reversion to the mean is the iron law.
• The Magellan Example (Ch 7): Peter Lynch's Fidelity Magellan earned 16% annually. Average Magellan investor earned 7%. Because they bought high and sold low. "The average fund investor underperforms the average fund by about 3% per year."
• The Three-Fund Portfolio (Ch 13, 18, 19): Total Stock Market Index. Total International Stock Index. Total Bond Market Index. Allocate bonds = age. Rebalance yearly. That's everything you need.
• Future Returns (Ch 9): Expect 4-6% annually going forward (not 10%). Lower returns make cost control even more critical. "The lower returns expected in the coming decade make it even more important to control costs."
• Bogle's Final Word: "Time is your friend. Impulse is your enemy." Index, rebalance, ignore the noise, and hold forever.
• The Vanguard Structure: Bogle's second great innovation: a mutual company owned by its fund shareholders. No outside owners demanding profits. This structure allows Vanguard to charge at cost. The industry average expense ratio is ~0.70%. Vanguard's is 0.12%. That six-fold difference compounds into hundreds of thousands of dollars over an investing lifetime.

Key Principles

1. Get What You Don't Pay For. The less you pay, the more you keep.
2. Investment Return Beats Speculative Return. Dividends + earnings = real wealth.
3. Active Management Is a Loser's Game. After costs, it's mathematically impossible to win.
4. Past Performance Is a Trap. Reversion to the mean is inevitable.
5. Costs Compound Like Returns. The tyranny of compounding is relentless.
6. Taxes Are Costs, Too. Low turnover = low taxes.
7. Simplicity Is the Master Key. One stock fund. One bond fund. Done.

Anti-Pattern Summary

The central error: believing you can beat the market. Evidence: 2.5% success rate over 46 years. See references/4-anti-patterns.md.

Self-Check

Recall Test — 10 triggers:

1. ✅ "What is the Gotrocks parable?"
2. ✅ "What percentage of active funds beat the S&P 500 over 15 years?"
3. ✅ "How many funds survived and outperformed from 1970 to 2016?"
4. ✅ "What happened to Fidelity Magellan investors vs the fund itself?"
5. ✅ "What is the tyranny of compounding costs?"
6. ✅ "What is reversion to the mean?"
7. ✅ "What is the three-fund portfolio?"
8. ✅ "What is Bogle's rule on asset allocation?"
9. ✅ "What does 'you get what you don't pay for' mean?"
10. ✅ "What did Warren Buffett say about Wall Street fees?"

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