Common Sense on Mutual Funds: New Imperatives for the Intelligent Investor aims to do two things: help its readers become more successful mutual fund investors, and chart a course for change in the mutual fund industry. While it is designed to be read sequentially, just as a typical book, it is in fact a series of 22 essays, each of which can be read independently. The first three parts of the book are purely about investment issues, encompassing (1) investment strategy, including the nature of financial market returns and asset allocation; (2) investment choices, including index funds, investment styles, and stock, bond, and global funds; and (3) investment performance, including the powerful role reversion to the mean plays in the financial markets, tax efficiency (and tax inefficiency), and the effect of time on return, risk, and cost.
The next two parts of the book turn to critical industry issues that have played a key role in the disappointing past records of mutual funds of all types. Part four, “On Fund Management” describes the industry’s deviation from its original principles, discusses the ascendancy of marketing over management as our talisman, rails at the failure of fund directors to uphold shareholder interests, and suggests the positive implications of the change in industry structure that I discussed a few moments ago. This subject matter, of course, is unusual stuff for a book on fund investing, but the subject of part five, “On Spirit,” is even more unusual. Here, I conclude that a mutual structure, as helpful to shareholders as it may be, is not enough. Irrespective of their structure, the firms in this industry need a mutual attitude toward serving investors, an attitude conspicuous only by its virtual absence today. So in part five, I take the liberty of describing the mutual values and spirit that, as Vanguard’s founder and leader, I have endeavored to inculcate in our enterprise.
“Common Sense” is the theme that suffuses each of the book’s subjects. Not only common sense as you and I understand it today, but “Common Sense” as Thomas Paine used it in his pamphlets some 225 years ago, presenting sentiments to the citizens of the Colonies “not yet sufficiently fashionable to procure their general favor … offering nothing more than simple facts and plain arguments,” and asking the reader to “generously enlarge his views beyond the present day.” I present similar sentiments to fund investors in my book.
Except for the final section, the book is not about Vanguard. It is largely about my deeply held convictions on how to invest successfully. Vanguard’s growth, which I described at the outset, seems to reflect an improving, indeed burgeoning, acceptance of the investment ideas, policies, and principles that I urge fund investors to adopt. And it is primarily by these means that we have established whatever competitive edge it is that we have, an edge that has enabled us to establish the structure and spirit that Forbes found to so clearly differentiate us from our rivals.