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 INVESTING |
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Smart investing
Common sense cure for takeover dramas
11 May 2007
Robin Bowerman
High-flying takeovers matched with the intriguing and complex machinations of the twilight world of hedge funds have made soap opera plots look positively lame in recent weeks.
Truth, it seems, can indeed be stranger than fiction although it would not surprise if some scriptwriter is beavering away right now on a new reality TV series titled TAKEOVER.
But what is the ordinary investor to make of all this? The glee and intrigue and the astronomical sums of money being written about almost daily stirs that most dangerous of investor emotions – the fear of missing out on fantastical profits.
So a good time for a healthy dose of common sense and return to investing basics. The trouble with commonsense is that it is not all that common so the recent publication of a book titled The Little Book of Common Sense Investing is well timed.
In the interests of disclosure the book is written by John C Bogle, the founder of Vanguard in the US and the man credited with launching the first public index fund and being an evangelist for the cause of low-cost index funds.
But this book is a gem for all types of investors. Now in his 80s Bogle has not been involved in the management of the company for many years but has devoted his energies to writing and researching on investing issues with this book being the latest outcome.
What makes this little book – and it is little in both size and page number – is that it is really a distillation of a career of working in the investment industry. And a distinguished career it has been with Bogle being named by the US magazine Fortune as one of four “Investment Giants” of the Twentieth Century while Time magazine named him one of the world’s most powerful and influential people in 2004.
Bogle helps put things in context: what is our basic aim as investors? – to earn our fair share of stockmarket returns is the answer. He then explores a lot of the myths that have built up about investing and calls on the writings of other great investors like Warren Buffett, Benjamin Graham, Charlie Munger, Burton Malkiel and William Bernstein to support his arguments that fundamentally investing can be quite simple and straightforward if you can avoid the massive distraction that the daily sharemarket provides.
The basic message is that “over the long-term share market returns are created by real investment returns earned by real businesses – the annual dividend yield on public companies plus their subsequent rate of earnings growth”. Bogle says that “in investing the winning strategy for reaping the rewards of capitalism depends on owning the businesses not trading stocks”.
He pays particular attention to an issue he argues investors ignore far too often – costs. Put simply he says “that where returns are concerned, time is your friend. But where costs are concerned time is your enemy”. He illustrates the power of compounding costs by looking at a portfolio that earns 8% before costs and 5.5% after fees are deducted. After year one the after cost portfolio is only 2% behind but after 10 years the after cost portfolio is 21% behind and in Bogle’s example over 50 years the costs have “consumed nearly 70% of the potential accumulation available simply by holding the market portfolio”.
At times of high drama in the stockmarket Bogle’s book is a great antidote and clarion call to keep things simple and stick with what you understand.
Whatever your views, you can discuss this article - or any of Robin's articles - on our message board Your 2 Cents.
Robin Bowerman is Head of Retail at index fund manager Vanguard Investments Australia and the former managing editor of Shares and Personal Investor magazines. To receive this column by email each week go to http://www.vanguard.com.au/ and register with smart investing. The Little Book of Common Sense Investing is published by Wiley and can be purchased via specialty online investment bookshop Moneybags.
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