Friday, December 21, 2012

Bogle on the Financial System

From this interview with John "Jack" Bogle on CNBC:

"...the role of the financial side of our society -- the financial system if you will -- is to direct capital to its highest and best and most profitable uses."

During the interview, Bogle pointed out that companies raise about $ 250 billion a year in financing through IPOs and other equity capital offerings. Yet there's something like $ 33 trillion or so of trading going on. So less than 1 percent of the activity is actually about helping capital get to where it is needed.
(Bogle has mentioned this on prior occasions using slightly different numbers.)

So what would he do about it?

- A transaction tax on trades. Very small but enough to slow things down.
- A tax on very short-term capital gains. Bogle added a twist. He thinks the tax should apply to tax exempt institutions and taxable investors (He points out that a bit less than 70% of stock in the U.S. is held by financial institutions.)
- A federal statute for the fiduciary duty of money managers. It would require them to emphasize long-term investing, low turnover, and low costs. Putting the interest of clients first. Anything but the norm these days.

He also said to remember that the financial system is a drag on market return. Trades don't happen outside of the system. One side wins, the other side loses. Well, except for whoever is in the middle of the transaction. By definition, a net reduction in returns for investors as a whole.

Bogle also added this on gold:

"The thing that has always bothered me about gold is it has no value-creating unit. Underlying common stocks are earnings and dividends. Underlying bond returns are interest coupons. Underlying gold returns are nothing. There's nothing -- there's no there there. So it's a complete speculation on price."

He also said that he's "well aware of the monetary hazards" that exist but it obviously hasn't impacted his view of gold.

Check out the full interview.


Related posts:
Graham on Investment: "Most Intelligent When It Is Most Businesslike"
John Bogle on Speculation & Capitalism's "Pathological Mutation"
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

Related article:
Market Speculation Is a Bigger Threat Than 'Cliff': Bogle

This site does not provide investing recommendations as that comes down to individual circumstances. Instead, it is for generalized informational, educational, and entertainment purposes. Visitors should always do their own research and consult, as needed, with a financial adviser that's familiar with the individual circumstances before making any investment decisions. Bottom line: The opinions found here should never be considered specific individualized investment advice and never a recommendation to buy or sell anything.