The Clash of the Cultures: Investment vs. Speculation
By John C. Bogle
John C. Bogle, the founder of the Vanguard Group, is back with a new
book about how short-term speculation has crowded out a focus on prudent
long-term investment and intrinsic value.
In The Clash of the Cultures (Wiley, $29.95, August 2012;
Hardcover), Bogle hones in on the clash that has become more pronounced
and extreme – to the detriment of long-term investors while generating
short-term profit for official market activity speculators – that is
fundamentally changing capital markets and capitalism.
During the last five years, the United States financial system has
raised $250 billion a year on average in IPOs and secondary offerings,
while trading volume came to an astounding $33 trillion. That means that
over 99.2 percent of stock market activity is speculative, and 0.8
percent is invested. Bogle recommends a return to the traditional
standards of long-term investment and a commitment to trusteeship to
turn that around.
The Clash of the Cultures reflects Bogle’s more than 60
years of experience working on behalf of investors. He describes the
culture of mutual funds when he started in 1951 as one of stewardship,
where professionals acted in the best interest of owners. Today the
culture is dominated by salesmanship, with fund managers placing their
own interests ahead of their shareholders. “Most mutual fund managers
have failed to live up to their responsibilities of corporate
citizenship,” Bogle writes.
Bogle exposes the “happy conspiracy” of our “dual-agency society.” Money
manager/agents and corporate manager/agents have developed an unhealthy,
symbiotic relationship that lies at the heart of our financial system’s
problems. Institutional investors, who own 70 percent of all shares in
U.S. corporations, are too focused on evanescent stock prices rather
than intrinsic corporate values.
A chapter on America’s Retirement System lays out Bogle’s ideas for how
to make retirement savings work. He wants to fix Social Security, and to
move defined contribution savings plans towards viable retirement plans.
He wants to minimize investing costs in the plans and limit the risk of
outliving policies through mandatory low-cost annuities.
Bogle also calls for a federal statute of fiduciary duty, which would
require fiduciaries place the interest of clients ahead of their own.
Conflicts of interest that are all too common at money management
conglomerates would be disallowed. The statute would outline the rights
and responsibilities of corporate governance, foster prudent investment
policies focused on long-term intrinsic values, and put the interests of
fund shareholders ahead of the interest of fund managers and of the
conglomerate’s public shareholders.
Bogle encourages readers to “become part of the army of investors who
will stand up and be counted, deal with the powerful challenges that
await our society, and serve our great nation in the years ahead.”
Using a mixture of history, case studies and statistics, Bogle dissects
the current culture of the financial markets and offers solutions on how
practices can be improved for the future, making The Clash of the
Cultures a must-read for everyday investors as well as Wall
Street professionals.
