The theme of this book is set in Chapter 1 with a memorable story about the Gotrocks family. The Gotrocks own 100 percent of every company in the U.S. and live off the dividends. Unfortunately, some family members start to buy and sell the shares of stock among themselves. This trading leads them to hire advisors to help them pick the shares to buy and sell. The advisors' pay lowers the family's overall returns from their stock, which is only worsened by the costs of the advisors' frequent trading to justify their existence. Taxes on capital gains from trading only make net returns even lower. In the end, the financial advisors do quite well and the Gotrocks do not do as well as they were doing before they started trading. Interestingly, Bogle calls this story a parable, thereby inviting comparisons with the Bible.
This story is Bogle's interpretation of the stock market and the mutual fund industry in the U.S. Business activity in the U.S. is a source of wealth. The stock market with its trading and the associated financial services industry is a drain on that wealth. Essentially, the stock market is a zero-sum game and all the frequent trading is a waste.
People can avoid this apparent waste by investing in an index fund that tracks the overall market and buying and holding that fund. Bogle advises focusing on the index funds' costs. This is an unsurprising recommendation from the founder of Vanguard, the mutual fund that introduced index funds and focuses on having low costs.
While the advice is sound, the analogy is off. Sometimes people want to buy or sell stock, not just live off the dividends. At what price do they do it? If no one pays any attention to firms' prospects, the prices at which stocks trade can bear no relation to the firms' prospects. If prices are uninformed, an investor will be better off becoming informed, even if becoming informed uses resources.
Do stock prices serve a useful function beyond providing prices at which people can buy and sell their stock? Actually, one important function of stock exchanges is revealing prices related to firms' prospects, which then can affect households' and firms' investment. Rising stock prices for firms and industries can signal improved investment opportunities, which encourages investment in better opportunities instead of just randomly picking investments. This is not just speculation. I have a published academic paper that shows just that effect titled “Does Opening A Stock Exchange Increase Economic Growth?” (This a link to the working paper. The published paper is in the Journal of International Money and Finance.)
Despite this flawed argument, Bogle's underlying point is well taken and the evidence in the book is correct.
Unless you intend to devote significant time and effort to managing your financial assets, you almost surely will be better off investing much of your financial wealth in a stock index fund.
Bogle backs up this argument with graphs and tables, none particularly complicated and all clearly supporting the advice.
Every chapter ends with an offset section “Don't Take My Word for It”, which includes quotes from other authorities giving the same advice as Bogle. These sections add an interesting touch, backing up the conclusion of the chapter and including interesting background information about the other authorities. References are not provided for any of the quotes.
The book ends with financial advice about holdings of financial assets, including a stock index fund and a bond index fund. Some of that advice is not particularly good, such as advice to buy only U.S. stocks. No justification is given for any particular level of bond holdings and the discussion of inflation-protected securities seems more like an afterthought than careful thought.
