Monday, October 24, 2011

Bogle: Back to the Basics - Speculation Dwarfing Investment

Speculation has been in the driver's seat to an increasing extent over the past couple decades.

Well, okay so that's not exactly breaking news but an important subject with substantial long run consequences. It also happens to be the topic of a new book that John Bogle is currently working on.

From this recent Morningstar interview with John Bogle:

Speculation Dwarfing Investment

High Turnover
"...the most actively traded stock today, everyday, is the SPDR, the Standard & Poor's 500 exchange-traded fund. And it turns over at about 10,000% a year. 10,000% a year! And I think 25% is a high turnover."

The Financial System
"Well, the idea of our financial system, our capitalistic system, was a system that directs capital to its highest and best uses, the best companies, the best growth prospects, making the best products at the best prices."

That's the idea of the financial system but...

"Well, in a typical recent year, ...our financial system has directed around $200 billion a year into initial public offerings and additional new public offerings and then additional offerings of company stock--$200 billion. We trade $40 trillion worth of stocks a year. So, that's 200 times as much speculation as there is investment." 

Bogle adds that, by definition, this doesn't enrich anyone but the croupier in the middle. He also points to the turnover in the SPDR ETF and the ratio of trading to initial public offerings to show how extreme this has all become. Other measures reveal the same.

In some other posts, I've pointed to the average holding period of stocks as another indication (a measure that has gone from several years to more like a few months).

When it comes to a vital system more of some activity is not necessarily better. Proportion matters. I think it's more than fair to say the tiny proportion of investment compared to an ever larger amount of speculation is now more than just a little out of balance.

Adam

Related posts:
Buffett on Gambling and Speculation
Buffett on Speculation and Investment - Part II
Buffett on Speculation and Investment - Part I

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