The Little Book of Common Sense Investing by John C. Bogle EPUB & PDF – eBook Details Online
- Status: Available for Free Download
- Authors: John C. Bogle
- Publish Date: October 16, 2017
- Language: English
- Genre: Mutual Funds, Investing, Finance
- Format: PDF/ePub
- Size: 2.7 MB
- Pages: 304
- Price: Free
- ISBN: 1119404509
A Parable
The Gotrocks Family
EVEN BEFORE YOU THINK about “index funds”—in their most basic form, mutual funds that
simply buy shares of substantially all of the stocks in the U.S. stock market and hold them
forever—you must understand how the stock market actually works. Perhaps this folksy
parable—my version of a story told by Warren Buffett, chairman of Berkshire Hathaway,
Inc., in the firm’s 2005 Annual Report—will clarify the foolishness and counterproductivity
of our vast and complex financial market system.
Once upon a Time . . .
A wealthy family named the Gotrocks, grown over the generations to include thousands of
brothers, sisters, aunts, uncles, and cousins, owned 100 percent of every stock in the
United States. Each year, they reaped the rewards of investing: all of the earnings growth
that those thousands of corporations generated and all of the dividends that they
distributed.
1 Each family member grew wealthier at the same pace, and all was
harmonious. Their investment compounded over the decades, creating enormous wealth.
The Gotrocks family was playing a winner’s game.
But after a while, a few fast-talking Helpers arrive on the scene, and they persuade some
“smart” Gotrocks cousins that they can earn a larger share than their relatives. These
Helpers convince the cousins to sell their shares in some of the companies to other family
members, and to buy shares of other companies from them in return. The Helpers handle
the transactions and, as brokers, they receive commissions for their services. The
ownership is thus rearranged among the family members. To their surprise, however, the
family wealth begins to grow at a slower pace.
Why? Because some of the investment
return is now consumed by the Helpers, and the family’s share of the generous pie that U.S.
industry bakes each year—all of those dividends paid, all those earnings reinvested in the
businesses— 100 percent at the outset, starts to decline, simply because some of the return
is now consumed by the Helpers.
To make matters worse, in addition to the taxes the family has always paid on their
dividends, some of the members are now also paying capital gains taxes. Their stockswapping back and forth generates capital gains taxes, further diminishing the family’s
total wealth.
The smart cousins quickly realize that their plan has actually diminished the rate of growth
in the family’s wealth. They recognize that their foray into stock-picking has been a failure,
and conclude that they need professional assistance, the better to pick the right stocks for
themselves. So they hire stock-picking experts—more Helpers!—to gain an advantage.
These money managers charge fees for their services. So when the family appraises its
wealth a year later, it finds that its share of the pie has diminished even further.
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