Friday, February 26, 2010

Bogle: History and the Classics

John Bogle thinks the investing and business world could benefit from more exposure to history and the classics. In this The Atlantic article, he explains why:

"I'm skeptical about the narrowness of the business school curriculum. I happen to believe it should have a much greater liberal arts emphasis, and even a much greater emphasis on the classics. The Odyssey will tell you an awful lot about human nature and life, and therefore about business, and societal values. Read the Odyssey. Read Dante's Inferno. You can also learn a lot by reading Seneca's essay on the shortness of life or Montaigne's essay on vanity." 

What makes a study of history and the Classics so important for business? 

"It involves critical thinking," Bogle explained. "It involves some kind of perspective, it involves some ability to think 'you know, this has happened before and it could be happening again now.'"

Bogle goes on to say that we've essentially gone from an ownership society to a situation where agents manage most of the money. Fifty or sixty years ago institutions owned something like eight percent of all stocks. They now own roughly 75 percent. Well, according to him, these agents need to change their emphasis.

"These are pension funds, pension managers, mutual fund managers, but they're agents for others, and they're not honoring their agency. They're not putting their clients first, their principles first. They've ignored their principles, focusing on speculation, rather than investment."

Bogle points out that speculation in aggregate can, especially when frictional costs are taken into account, potentially be worse than a zero sum outcome. In the article he refers to a speech that Ben Graham gave back in 1958. It's pretty clear that Graham would not have thought very highly of the quants.

In fact, it seems he would have consigned them to a rather low level of Dante's Inferno.

Bogle added the following later in the article:

"Somebody ought to spend a little time thinking," he said, "and this gets back to the classics, about the role of business in society. It should add value. But the financial business does not add value. By definition the financial business subtracts value. In round numbers, it takes something like $600 billion out of the pockets of investors every year. That's $6 trillion dollars in 10 years."

Charlie Munger, Paul Volcker, and Warren Buffett have, give or take, articulated similar views on the corrosive effects of short-termism and speculation in the financial system.* They have each generally argued for policies that reduce it over the years. Last September, Buffett and Bogle signed along with 25 others a letter titled Overcoming Short-termism that argued for policies that reduce speculation and encourage patient capital.

So there has been a fair amount of material (new and old) generated on this subject by some pretty good thinkers.

As of now, it appears their views and recommendations will not become policy in any meaningful way.

It will be a fairly unfortunate prospect if that's what happens. A hugely important missed opportunity. At the end of the article, Bogle also paraphrases a quote by Upton Sinclair:

"It's amazing how difficult it is for a man to understand something if he's paid a small fortune not to understand it."

Check out the full article.

Adam

Related post:
When Genius Failed...Again

* Based upon what they wrote in their own time, it seems likely that John Maynard Keynes or John Kenneth Galbraith wouldn't disagree much if at all.
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