Jack Bogle
“Don’t allow a winner’s game to become a loser’s game.”
The marvel of compounding returns translates into the equally wonderful returns in the stock market. However, those returns can become overwhelmed by the “tyranny of compounding the costs” of investing. For those who want to play the game of investing, the odds in favor of reaping superior returns are grim.
Most invest in stocks thinking that they can avoid the pitfalls of investing by researching and knowledge, and they trade in stocks in an effort to stay one step ahead of the game. The reality is that investors who trade the least have more of a fighting chance of capturing the market’s return because those that trade the most are often doomed to failure.
Bogle cites an academic study that showed the most active one-fifth of all stock traders turned their portfolios over at a rate of more than 21 percent per month. While they may have earned the market return of 17.9 percent per year during the period 1990 to 1996, they incurred trading costs of about 6.5 percent, leaving them with an annual return of only 11.4 percent, only two-thirds of the return in that strong market upswing.
Mutual fund investors are blind to costs.
Similarly, mutual fund investors pick funds based on recent performance superiority of fund managers and hire advisers to help them. They seem blind to the costs. Fund investors willingly pay heavy sales loads and incur excessive fees and expenses and are victim to the hidden transaction costs incurred by funds as a result of frequent portfolio turnover. Fund investors act confidently that they can easily select excellent fund managers, but they can’t.
In contrast, those who invest and then drop out completely of the investing game (never paying a single cost) are happy as clams! They own businesses, and those businesses as a group earn meaningful returns on their capital and pay out dividends to their owners. While some companies will fail, in the aggregate, businesses grow with the long-term growth of the economy!
Bogle tells us that if you choose to play the winner’s game of owning businesses and refrain from playing the loser’s game of trying to beat the market, you can begin the task by using your “own common sense,” understanding the system and investing in accordance with the only principles that will eliminate all of its excessive costs. Only then, whatever returns businesses will deliver in the years ahead, you will be guaranteed to earn your fair share. Bogle says that when you understand these realities, it’s all about common sense.
Links for Further Reading:
Shirt Charley Ellis video on winning the loser’s game – https://www.youtube.com/watch?v=r_T_O9eAqkw
Long British video on winning the loser’s game – https://www.youtube.com/watch?v=SwkjqGd8NC4
