The Little Book of Common Sense Investing, Updated and Revised

Chapter ThreeCast Your Lot with Business

Win by Keeping It Simple—Rely on Occam’s Razor.

HOW DO YOU CAST your lot with business? Simply by buying a portfolio that owns shares of every business in the United States and then holding it forever. This simple concept guarantees you will win the investment game played by most other investors who—as a group—are guaranteed to lose.

Please don’t equate simplicity with stupidity. Way back in 1320, William of Occam nicely expressed the virtue of simplicity, essentially setting forth this precept: When there are multiple solutions to a problem, choose the simplest one.¹ And so Occam’s razor came to represent a major principle of scientific inquiry. By far the simplest way to own all of U.S. businesses is to hold the total stock market portfolio or its equivalent.

Occam’s razor: When there are multiple solutions to a problem, choose the simplest one.

For the past 90 years, the accepted stock market portfolio has been represented by the Standard & Poor’s 500 Index (the S&P 500). It was created in 1926 as the Composite Index, and now lists 500 stocks.² It is essentially composed of the 500 largest U.S. corporations, weighted by the value of their market capitalizations. In recent years, these 500 stocks have represented about 85 percent of the market value of all U.S. stocks. The beauty of such a market-cap-weighted index is that it never needs to be rebalanced by buying and selling shares due to changing stock prices.

With the enormous ...