Friday, January 27, 2012

John Bogle on Speculation & Capitalism's "Pathological Mutation"

"It is said on Wall Street, correctly, 'money has no conscience,' but don't allow that truism to let you ignore your own conscience, nor to alter your own conduct and character." - John Bogle in a 2007 Georgetown speech

John Bogle, founder and former chief executive of The Vanguard Group, mentions the above quote in this 2009 speech. In the more recent speech he also explained what inspired the title of his book Enough:

"I wrote my new book largely because I care deeply about the traditional values that are eroding not only in our financial system, but also in our businesses, in our communities, and even in our own lives. The story of ENOUGH begins with a sort-of-poem by Kurt Vonnegut. It was entitled "Joe Heller," and I chanced upon it in The New Yorker in April 2005. The poem was a tribute to the late author of Catch 22—one of the seminal books of the post-World-War-II era, and one of its most successful. I can summarize the short poem in just a few words:

At a party given by a billionaire on Shelter Island, Kurt Vonnegut tells Heller that their host, a hedge fund manager, had made more money in a single day than Heller had earned from his wildly popular novel Catch 22 over its whole history. Heller responds, 'Yes, but I have something he will never have...enough.'"

For Bogle, the rampant greed and disgraceful conduct that now overwhelms "our financial system and corporate world runs deeper than money."

To him, the behavior "subverts our society's traditional values" and results in the "diminution of our national character and values."

More from the 2009 speech by John Bogle:

Capitalism's "Pathological Mutation"
"During the past half-century, the very nature of capitalism has undergone a pathological mutation. We have moved from an ownership society in which 92 percent of stocks were held by individual investors looking after their own interests and only 8 percent by financial institutions, to an agency society in which our institutions now hold 75 percent of stocks and individuals hold but 25 percent.

These institutional agents have not only betrayed the interests of the principals to whom they owe a duty of trusteeship, but have also abandoned their traditional investment principles. For it is these agents who have been the driving force in changing the central characteristic of market participation from long-term investment—owning businesses that earn a return on their capital, creating value by reinvesting their earnings and distributing dividends to their owners—to short-term speculation, essentially trading stocks and betting on their future prices. It is not only hedge funds that are playing this game, but most mutual funds and many giant pension plans.

Today, we are witnessing an orgy of speculation the likes of which have never been seen before."

Speculation in the Drivers Seat
"Revenues of our stock brokerage firms, money managers, and the other insiders soared from an estimated $60 billion in 1990 to some $600 billion in 2007.

So while trading back and forth with one another—foolish as it is—is by definition a zero-sum game, once the costs of our Wall Street croupiers are deducted it is a loser's game."

Later he added...

"That $600 billion in 2007 plus many hundreds of billions in earlier years, obviously represent a truly staggering hit to the gains investors earned in the bull market, and a financial slap in their face in the bear market that followed. Any confidence in Wall Street that our investors once may have had has largely vanished, just as it should have."

John Bogle has long been known as the "conscience of Wall Street" for a reason. In a more recent speech, he said "we need not only ethical principles to guide us, but ethical principals to assure their observance".

Well, I think it's fair to say that the principal -- in this case John Bogle -- behind the principles that led to the creation of Vanguard has, over the decades, made the world more than just a bit better for long-term investors.

Adam

Related posts:
Bogle: Back to the Basics - Speculation Dwarfing Investment
Buffett on Gambling and Speculation
Buffett on Speculation and Investment - Part II
Buffett on Speculation and Investment - Part I

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