The Little Book of Common Sense Investing

Successful investing is ALL about COMMON SENSE.

• A winning strategy is to own all of the nation’s businesses at a meager cost.
• This will capture the entire market’s dividends and growth.
• The best way to implement this is through index funds.

Danger

Before deducting the costs of investing, beating the market is a zero-sum game. After deducting the costs of investing, beating the stock market is a loser’s game.

For investors as a whole, returns decrease as motion increases!

• Occam’s Razor - When there are multiple solutions to a problem, choose the simplest one.
• The simplest way to win in the stock market is to own everything!
• The simplest way to hold every stock is to have a total stock market portfolio.
  • Best achieved through an index fund.

Investment Costs

• Investors as a group get what they don’t pay for. So if you don’t pay, you get everything.
• The costs of financial intermediation are very high. Make sure your costs are meager.
• Over the long term, compounding returns are overwhelmed by compounding costs.
• Index funds are tax-efficient. They allow investors to defer capital gains until they sell.
  • Delaying selling allows turnover to remain low, leading to lower taxes.
• Investment return = Return - Tax - Investment Costs - Inflation ⇒ Minimize your costs.
• In a future with low returns, low-cost, tax-efficient funds remain good investment vehicles.
  • The lower the returns, the worse the effect of investment costs on real returns.
• Select index funds without sales loads (commissions).
• Low-cost index funds outperform the average actively managed funds in less efficient markets.

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

Warren Buffett's 4 E's of Investment

The greatest Enemies of the Equity investor are Expenses and Emotions.

Fixed-Income Securities

Fixed-income securities include bonds, money market funds, and HYSAs. The rates produced by these securities are directly related to the interest rates.

Bonds

• Long-dated bonds are more volatile but provide higher returns than short-dated bonds.
• Bonds represent debt; bonds default if the interest for the underlying securities isn’t paid.
• There are three major classes of bonds -
  1. Taxable corporate and government bonds.
  2. Tax-exempt municipal bonds.
  3. US Treasury Bills.
• Always avoid bond funds with sales loads.

Money Market Funds

• Money Market Funds are short-term bond funds with uniform high credit quality.
• With short maturities, high credit quality, and diversified portfolios, money market funds become commodities.
• They are not FDIC-insured like HYSAs.