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By Christine Benz | 10-13-2011 10:47 AM

Bogle: Speculation Dwarfing Investment

The Vanguard founder and former chairman calculates there is 200 times as much speculation as there is investment in the market today.

Benz: So that's the topic of the book that you are working on currently, the fact that speculation in many ways has been in the driver's seat for the past couple of decades, really.

Bogle: ... Growing all throughout that period. And now it's reached a ridiculous point. You look at, for example, and it's sometimes hard to find these, because people do it so unevenly, but 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.

Another very good example is, that I will use in my book, is, how do we measure investment? 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. Put it that way.

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. One only has to understand that all this trading back and forth, by definition, doesn't enrich the investor, because if I buy, you sell and vice versa, but what it does is enrich the croupier in the middle, which we call Wall Street, which has a bunch of very angry people sitting on its doorstep as we speak.

Benz: So some of that trading, even for buy-and-hold investors, might be necessary, as we all rebalance and maybe shift our portfolios into more conservative investments as we get older. But you think beyond that, it just fuels this speculative frenzy?

Bogle: Yes, ... the effect of that kind of trading on the market is infinitely smaller.

Benz: De minimis.

Bogle: There's also a question about whether rebalancing is that valuable. We know that in the long run, the higher yielding asset is the one you want the most of, and we know that stocks inevitably will be, not in every period, but much more often than not, the higher-yielding asset. So, if you keep rebalancing, you will be cutting into your long-term returns.

Now you will take on more volatility. I'm not a big fan. I don't object to it at all. But I think we may overdo the kind of precision of rebalancing. I think it should be done less frequently than a lot of people do it, and only at bigger margins. In other words, if you want to be 50-50, let it go to 56% or 57% or 58%, maybe even to 60% before you rebalance. And the other way, let it go to 40% before you rebalance. Don't try and turn this into a science, because if there's anything that our markets are, they are non-scientific…

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