Bogle: Investing wins, speculation loses

Christine Benz  |  19/11/2012Text size  Decrease  Increase  |  

Christine Benz: Jack, I want segue and talk a little bit about your most recent book, The Clash of the Cultures, and the clash is between a long-term investment culture and one that is based on short-term speculation. Let's talk about how that culture clash unfolded. What has driven the increasing focus on more speculative styles of investing?

Jack Bogle: Well, first of all, it comes around I think by and large, the kind of thing we had in the late 1990s - the information age and all that kind of thing - where the price of the stock became more important than the intrinsic value of a company. And when you focus on prices and pretty much disregard intrinsic values, you are just gambling.

Will people take your stock from you at a higher price than you paid for it, or you are buying and hoping to sell at a higher price. That's kind of the spirit of the thing; that's where the turnover comes from. And it's very, very dangerous. Add to that, stock prices became especially important during the '80s when we had executive-compensation options and corporations were judging themselves on the price of the stock. And the security analysts were judging the price of the stock. They wanted a short-term earnings guidance, short-term quarterly guidance, or something. And it just gradually turned bigger and bigger, inflamed - if that's the right word and I think is - by the huge boom we had in the '80s and '90s. Stocks looked like easy street. There is no easy street. And so it all kind of accumulated to the point where speculation has crowded out a lot of investment.

One example I used in the book is, how do you measure this? Well, if you call investment fulfilling the basic function of the financial system, and that is directing capital to its highest and best uses, you're talking about money gets directed in new ventures, existing companies, innovative companies, whatever it might be. And that has been running about $250 billion a year. How do you measure speculation? [You do so] by the amount of trading that goes on in the market, and that's around $33 trillion a year. So, if you want to look at it hard-nosed, 99.2 per cent of what goes on in the market is speculation and 0.8 per cent is an investment in the stockmarket.

Benz: What in your view would reverse that trend toward speculation? What are some steps that could be taken?

Bogle: Well, first of all, there's a natural tendency for it to blow itself out. If we had good market decline, for example.

Benz: And we did.

Bogle: And we see some of it now. High-frequency trading is distinctly less now and then we'd have to have a big market blowout, of course. There are a number of other factors. [One is] waking up investors - speculators lose, investors win, by definition. I mean think of this example. There are 500 stocks in the S&P 500, and let's assume that half of the number of shares outstanding of each are owned by long-term investors who never trade. The other half is owned by speculators who trade with a frenzy. The investors by definition will capture the market return, investors as a group, and the speculators by definition will capture the market return, too, but only before deducting the cost of all that speculation.

So, it's a mathematical tautology that investing wins and speculating loses. And if we could ever get investors to focus on that simple fact, as Ben Graham said - he has got more good quotes, but I think this maybe his very best - in the short run the stockmarket is a voting machine, but in the long run the stock market is a weighing machine. We have to get back to that. And he was taking this on by the way because it was starting to happen when he was still alive. He died I think in 1949. And it was starting to happen even then, and he was criticizing all the institutional trading. He was talking about these institutions are great big laundries that take in each other's laundry every day and clean it up and send it out to somebody else. He was a wise man.

Video Archive...

When does market volatility matter to your portfolio?
18/05/2016  Long-term investors should embrace volatility, says Morningstar Investment Management's Dan Kemp, as it offers opportunities, not risk.
Emerging markets: Challenged but on the rise
16/05/2016  JP Morgan's chief market strategist for the UK and Europe, Stephanie Flanders, says that global recession fears are unfounded--but markets remain challenging for investors.
Energy fundamentals feed market volatility
11/05/2016  Oil price volatility and global energy fundamentals are impacting stocks across the board, according to Morningstar's energy analyst Mark Taylor.
Does dollar-cost averaging improve returns?
04/05/2016  Dribbling money in over time can effectively minimise risk, but it's not a wealth-creating process, according to US-based financial planning expert Michael Kitces.
Big bank dividends are sustainable
29/04/2016  Westpac, ANZ and National Australia Bank report half-year earnings in the week commencing 2 May and Morningstar's David Ellis gives investors a taste of what to expect.
Don't expect iron ore rally to continue
26/04/2016  Investors are underestimating how much steel demand could decline, says Morningstar's David Wang.
Japan running out of options to boost growth
26/04/2016  Japan's is into its second lost decade. Have central bankers run out of policy tools? JPMorgan's London-based Talib Sheikh says investors should be wary of further easing.
China businesses are unattractive to investors
20/04/2016  China may be the biggest player in the emerging market universe, but there are far more compelling investment opportunities in Africa and South America, according to a UK-based fund manager.
Where should you invest in Australian media?
15/04/2016  MandA fever may be building towards a "Groundhog Day" ahead of a potential relaxation of media ownership laws in Australia, as structural headwinds continue to intensify.
Where should you invest in Australian media?
15/04/2016  M&A fever may be building towards a "Groundhog Day" ahead of a potential relaxation of media ownership laws in Australia, as structural headwinds continue to intensify.
China's debt is not a problem
15/04/2016  The International Monetary Fund has expressed concerns about China's debt levels but Doug Turnbull of the UK-based Neptune Investment Management says the debt is concentrated and not a problem.
Value investing in a low growth environment
07/04/2016  Morningstar's Daniel Needham explains how to buy an equity or bond at less than its intrinsic worth in a world where the reward for risk investing is diminished.
5 demographic trends driving investment profit
06/04/2016  What is the influence of workers and consumers on stock markets? Dr Amlan Roy explains the implications for asset prices and capital flows, emerging markets and sustainability.
The Morningstar Economic Moat Rating
01/04/2016  The Morningstar Economic Moat Rating represents a company's sustainable competitive advantage. A company with an economic moat can fend off competition and earn high returns on capital for many years to come.
Why you should shun popular stocks
31/03/2016  Investors cannot all buy the same stock at the same price--popularity affects price and leads us to buy high and sell low, obliterating any profit we could have gained.
How to break from the crowd and be a successful investor
31/03/2016  Sir John Templeton stated that: "It is impossible to produce superior performance unless you do something different from the majority." James Montier from asset manager GMO explains how.
Is it too late to invest in Japanese equities?
22/03/2016  The easy money has already been made in Japan, the UK-based Polar Capital's James Salter says, but look for those cyclical stocks with depressed prices and you can still make a profit.
Don't lose the overconfidence game
22/03/2016  Investors who are overconfident in their abilities may trade more often and hurt themselves in the end, says UC Berkeley professor Terry Odean.
What's in store for Telstra shareholders?
18/03/2016  Morningstar's Brian Han talks investors through Telstra's half-year result and why the telecoms giant has been trailing the market since the start of 2016.
Preparing for lower long-term returns
10/03/2016  Investors may not be rewarded for risk-taking during the next several years, so they should tweak their spending and saving patterns instead, says US-based financial-planning expert Michael Kitces.