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The Little Book of Common Sense Investing, Updated and Revised by John C. Bogle

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Chapter FourHow Most Investors Turn a Winner’s Game into a Loser’s Game

“The Relentless Rules of Humble Arithmetic”

BEFORE WE TURN TO the success of indexing as an investment strategy, let’s explore in a bit more depth just why it is that investors as a group fail to earn the returns that our corporations generate through their dividends and earnings growth, which are ultimately reflected in the prices of their stocks. Why? Because investors as a group must necessarily earn precisely the market return, before the costs of investing are deducted.

When we subtract those costs of financial intermediation—all those management fees, all of that portfolio turnover, all of those brokerage commissions, all of those sales loads, all of those advertising costs, all of those operating costs, all of those legal fees—the returns of investors as a group must, and will, and do fall short of the market return by an amount precisely equal to the aggregate amount of those costs. That is the simple, undeniable reality of investing.

In a market that returns 7 percent in a given year, we investors together earn a gross return of 7 percent. (Duh!) But after we pay our financial intermediaries, we pocket only what remains. (And we pay them whether our returns are positive or negative!)

Before costs, beating the market is a zero-sum game. After costs, it is a loser’s game.

There are, then, these two certainties: (1) Beating the market before costs is a zero-sum game. (2) Beating the market after ...

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