Tuesday, September 15, 2015

Bogle on Speculation

John "Jack" Bogle recently said the following on CNBC about volatility in the capital markets:

"It's just speculators not speculating on what they think is going to happen but what they think other speculators think is going to happen..."

So it's too much focus on trying to guess how other market participants might behave, along with other near-term events (fed action or inaction, earnings reports, GDP growth), instead of gauging the intrinsic values of businesses.

"This speculative binge that we're seeing here … has nothing to do with the fundamentals behind the long-term value of equities in particular, which are created by the values of corporations, earnings and dividends, and reinvestment in the business."

Estimating intrinsic business values is challenging enough; guessing what the market -- or any individual security -- is going to do is if not impossible, for most of us at least, a fool's game.

The idea that since a little speculation in markets is a good thing then unlimited amounts must become a wonderful thing is a fallacy. The petrol engine in my car likes roughly the right amount of air relative to fuel in order for the combustion process to work. So that means, at some point, too much -- or too little -- air compared to fuel will actually hinder performance.

It's about optimization. The same is true for capital markets. I'd argue there's way too much activity geared toward what's going to happen in the next minute, hour, day, week, month -- and even a year or two. Too much air; not enough fuel.

All of those time frames are way too short to be considered investment activity. It's speculation and even pure gambling (there's a difference between the two) over investment.

There are important reasons for the capital markets to exist and the focus should be mostly on what's the optimal way to makes sure it serves the real economy instead of itself.


Related posts:
Zero-Sum Games
On Speculation and Investment
Bogle on the Financial System
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

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