There are investors who are not only great investors, but who have also shaped the financial world as we know it today.

One of them is undoubtedly the legendary John “Jack” Bogle, the father of passive investing.

In this article, I want to share with you five extraordinary lessons that Bogle left us in his book The Little Book of Common Sense Investing.

The Little Book of Common Sense Investing: John “Jack” Bogle’s Masterpiece

John “Jack” Bogle is a name that most Italians are not familiar with.

In the United States, however, he is considered a true legend.

A financial giant like Warren Buffett once said about him:

“Jack has done more for American investors than any individual I’ve known.
Many people on Wall Street make a lot of money for doing very little.
Jack charged very little and delivered outstanding returns to investors.”

And American investors (and not only them) have clearly recognized and rewarded his work.

The investment company he founded, Vanguard, is today the largest asset manager in the world by assets under management.

Despite this, Vanguard continues to apply very low fees, with the goal of allowing investors to keep as much of their returns as possible.

Bogle is also the creator of index funds—funds designed to track market indices—on which the vast majority of ETFs we often discuss here on the blog and in our Facebook group Puzoy are based.

In The Little Book of Common Sense Investing—the only book Bogle ever wrote—he explains in detail not only his investment philosophy, but also why funds that track market indices, rather than trying to beat them, represent the best choice for non-professional investors.

It is not a book for those with absolutely no experience in investing.
However, it offers several valuable insights and concepts that can prove extremely useful even for those who are just beginning their financial journey.

Let’s take a closer look at them together.

Do Nothing. Stay Put.

Imagine paying a professional investor a hefty fee to manage your savings.

After three months, you ask what they’ve done, and they reply:

“Nothing. There was nothing to do; we’re waiting for the right moment.”

Would you be happy with that answer?

I bet you’d want to fire them on the spot.

The reality is that, in investing, there is often very little to do.

Or rather, sometimes the best decision is to do nothing at all.

There are periods—most of the time, in fact—when attractive investment opportunities are scarce, alternating with much shorter periods of intense activity.

But clients don’t care about this.

They paid to see action and results, not to receive a lesson in philosophy.

Fund managers know this very well. And in order not to lose clients, they often engage in overtrading, buying and selling assets when they shouldn’t, just to show that they are “doing something.”

This is a classic example of activity bias.

And it inevitably hurts performance, reducing overall returns.

Charlie Munger, Warren Buffett’s long-time business partner, explained it perfectly:

“Modern money management systems require people to pretend to do something they can’t do and to like something they don’t like.
It’s funny, because when you look at the investment management industry as a whole, it doesn’t add value to all the buyers of financial products.”

For non-professional investors, therefore, it is far better to rely on properly diversified ETFs, which do not require intermediaries and need very little ongoing management.

The Force of Gravity in the Stock Market

One of the most compelling chapters in the book explains where stock market returns actually come from.

Bogle identifies two main components: investment return and speculative return.

Investment return is based on the initial dividend paid by a company, plus the possible growth of profits and of what is known as the company’s intrinsic value.

Put simply, the more efficiently a company generates profits and cash flows, the more valuable it becomes in the eyes of investors—and the more they are willing to pay to own a piece of it.

This value, driven by profits and positive cash flows, is what we call intrinsic value.

Speculative return, on the other hand, is based on changes in prices and in the P/E multiple (Price/Earnings ratio), one of the most commonly used indicators in fundamental analysis to assess whether a stock is expensive or cheap.

To oversimplify, a very high P/E ratio suggests that the market has extremely high expectations for that company.

Investors are betting that money will pour in abundantly in the near future.

The problem with this component of return is that, over the long term (10–20 years), it becomes largely irrelevant.

The total return earned by all investors—the market as a whole—must ultimately be proportional to the profits generated by the underlying businesses.

When prices become excessively inflated due to speculative returns, you can be sure that sooner or later a sharp correction will occur. And those who bought driven purely by greed will end up blaming bad luck.

Prices then succumb to financial gravity, returning to more reasonable levels—or even turning into bargain prices—because many investors panic and sell at any price.

And so the cycle repeats, one market cycle after another.

One final note.

Many people are afraid to invest in the stock market because they’ve heard that the stock market is a zero-sum game, where one person’s gain is another person’s loss.

This is true only for the speculative component of stock market returns—and only in the short term.

Over the long term, if companies continue to improve their ability to generate profits and cash, they will pay higher dividends to shareholders or buy back more of their own shares.

And this is what turns equity investing into not a zero-sum game, but a positive-sum one.

How Many Funds Really Beat the Market?

“Invest for the long term” is one of the most common pieces of advice you hear in the world of investing.

But doing so through actively managed funds is anything but easy, for one simple reason:

most of these funds do not survive over such long time horizons.

In his book, Bogle presents an analysis of 305 active funds operating in the 1970s.

Thirty-five years later, 223 of those funds were out of business, either because they failed to beat the market or because they were crushed by increasingly fierce competition.

Of the 82 funds that survived, only 24 managed to outperform the index. And among those 24, only 9 achieved a meaningful outperformance (greater than 1%).

Out of these 9, 6 delivered strong results early on, when they were still small, only to underperform the market in the later years of the study.

In the end, only 3 funds were able to deliver consistent outperformance.

That’s roughly 1%.

And even then, there is no guarantee that these funds were able to continue beating the market afterward.

So, when you choose a professionally managed fund, you face a 1% to 10% chance of beating the market, and a 75% chance that the fund will shut down, forcing you to sell at a time you would rather avoid.

Clearly, these are not the odds anyone would want for the money they are setting aside for retirement.

Bogle explains extremely well why investing in well-diversified ETFs is instead a solid solution:

“Investing in index-based ETFs may not be the best investment strategy ever devised, but the number of investment strategies that are worse than it is infinite.”

Not All ETFs Are Created Equal

An entire chapter of the book is devoted to… criticizing ETFs.

For those who have been following us for a while, this may come as a big surprise.

Haven’t we said countless times that ETFs are the best investment vehicles available?

The answer is simple: only properly diversified ETFs (by geographic area, sector, and asset class) are suitable for long-term investing.

However, once the asset management industry realized that ETFs were a potential gold mine, it began to exploit this opportunity for its own benefit.

As a result, a huge number of new indices were created—very different from traditional ones like the Nasdaq or the FTSE MIB—designed to track almost anything imaginable:

• indices that track a single country,
• others focused on a single sector such as robotics or cybersecurity,
• some that allow short exposure,
• others based on specific factors like low P/E ratios,
• and so on.

All these so-called “second-generation ETFs” have betrayed the original idea behind ETFs and have effectively become another tool for speculation.

Bogle strongly warns investors against these products and encourages the use of true index funds (unfortunately not available in Europe), or at least broad, well-diversified ETFs, held patiently over the long term rather than traded frequently.

Buying ETFs simply because you’ve heard they are a “good product,” without a clear investment strategy, is a great way to lose money—exactly like any other investment made without understanding what you are actually buying.

A Short Guide for Speculators

The part of the book that surprised me the most is a short guide for speculators, written by Bogle himself.

At first glance, this may seem contradictory—after more than 200 pages spent explaining why investing in individual stocks or actively managed funds is, on average, a losing bet.
But Bogle, with his deep understanding of human nature, knew very well that part of us invests not only for rational reasons, but also for the pleasure of seeing money “come from nowhere” or for the satisfaction of being proven right by the market.

It’s no coincidence that Vanguard, before achieving global success with index-tracking funds, had to sustain itself for years by selling actively managed funds.

Speculation does not mean throwing your money into the fireplace without a method.
For this reason, Bogle clearly explains which instruments can be used for speculation and what percentage of your total wealth should be allocated to it.

According to him, speculation should be limited to 5% of your portfolio.
However, if you truly know what you are doing, this allocation can reasonably go up to 10%.

So, where should you invest if you want to speculate?

Here is Jack’s answer.

• Individual stocks? Yes, choose a few. Listen to promoters, your advisor, your neighbor—yes, even your brother-in-law.
• Actively managed funds? Yes, but only if they are run by managers who own their own firms, have a clear investment philosophy, and invest with a long-term mindset.
  (Note: these funds are mostly based in the United States. Unfortunately, in Europe and Italy there are very few exceptions.)
• Active funds that try to mimic market indices? No. They are a waste of money. At that point, ETFs are a better choice.
• Poorly diversified ETFs? If you really want to, you can place a few bets on a sector where you are underexposed—but don’t overdo it.
• Commodity-based funds? No. You will most likely enter too late, when a bubble has already formed.
• Hedge funds? No. Too much noise for too little value. The gap between winners and losers is enormous, strategies are wildly different, and extremely high fees destroy even the small chance of success.
• Funds that invest in hedge funds? No—even worse.

By following these guidelines, you won’t become a speculative superstar, but you will at least avoid throwing all your money into things you don’t understand—and you’ll be able to explore this world with only a small portion of your capital.

From theory to practice, Puzoy provides all the tools you need—including multiple investment portfolio models—to help you achieve your personal investment goals.