John Bogle Interview

 

This is absolutely one of the best interviews I’ve seen about investing, capitalism, business and economics. I have highlighted the key passages:

JOHN BOGLE: I came into this business in the 1950’s, it was a business focused on the wisdom of long term investing. We changed in that period to a business that is focused on the folly of short term speculation. And think about this for a minute. If you’re a true investor holding a company for the long term, you’re well aware that the value in that company is company’s earnings compounded over time, developing new products and services, developing efficiencies– trying to size up the proper corporate strategy, you know, making the company more valuable. But, in the folly of short term speculation, you’re just thinking will that stock be worth more or less six months from now or a year from now?Give you a very specific example. In the first 15 years I was in this business, the average mutual fund held the average stock for seven years. Call that long term investing. Now, the average mutual fund holds the average stock for one year. That’s short term speculation. So, if you’re a speculator, you don’t care much about ownership interest. You don’t care so much about corporate governance. Why vote a proxy, for example, if you’ll not even be holding a stock in three months?

The other part of it is,and this is really makes it a very difficult problem to solve. And that is a little about of — I guess it’s Pogo — we have met the enemy and they are us. These mutual fund companies– these management companies are now owned largely by corporate America. Or international corporations — Deutsche Bank — AXA, big international companies who have bought their way into the US financial system, which is– don’t mean to demean that. But, they own these public corporations– giant public corporations like insurance companies, big banks– foreign insurance companies and banks own 41 of the 50 largest mutual fund managers.

Now, what is the job of a corporation when they buy into a mutual fund management company? It’s to earn a return on the capital they invest in that company. It’s not to earn a return on the capital of the investors who invested with that mutual fund. Now, in fairness, they want to earn as much money as they can for the fund shareholders. But, not at their own expense.

What we’ve done is have you know, what I call in the book, a pathological mutation of capitalism from that old traditional owners’ capitalism to a new form of capitalism, which is manager’s capitalism. The evidence is quite compelling that today corporations are run in a very important way to maximize the returns of its managers at the expense of its stockholders. 

Even Allen Greenspan says in his book he’s worried, new book– he’s worried about this division in the society. He’s worried about dissatisfaction. He’s worried about violence in our society. You can only have so much of an advantage to those at the top of the pyramid, and so much disadvantage that’s at the bottom of the pyramid, before you start to get some very difficult things going on. 

BILL MOYERS: This seems to me to be your great concern, that this self correcting faculty that is built into both democracy and capitalism is in jeopardy? 

JOHN BOGLE: Actually, I think it’s fair to say it’s in jeopardy. But there’s one sense that it’s not in jeopardy. And that is, ultimately, the system will correct. The bigger the boom, I fear, the bigger the bust. In other words, you pay the price. It’s not a self sustaining system at this kind of a level. 

BILL MOYERS: What does it say to you that people seem so indifferent to the fact that one tenth of one percent of the population owns most of the wealth in this country? 

JOHN BOGLE: Well, in the long run, I believe it’s unsustainable. You know, this is not going to be, you know, a country like France, say, at the time of before the French Revolution. You know, the lords of France, the kings had probably the same kind of distribution of wealth we had today come by through long generations. Their own castles. We have those castles in America now. But it says to me that, in this society, it’s not sustainable. There will be an outcry.

BILL MOYERS: What should be the dominant? What is the job of capitalism? 

JOHN BOGLE: Well, ultimately, the job of capitalism is to serve the consumer. Serve the citizenry. You’re allowed to make a profit for that. But, you’ve got to provide good products and services at fair prices. And that’s the long term, that’s what businesses do in the long term. The businesses that have endured in America have done that and done that successfully.

But, in the short term, there’s all these financial machinations in which people can get very rich in a very short period of time by creating highly complex financial instruments, providing services that can be cut back easily as in the hospital article, not measuring up to basically their duty.

We all know that in professions, the idea has been service to the client before service to self. That’s what a profession is. That’s what medicine was. That’s what accountancy was. That’s what attorneys used to be. That’s what trusteeship used to be inside the mutual fund industry. But, we’ve moved from that to a big capital accumulation — self interest — creating wealth for the providers of these services when the providers of these services are in fact subtracting value from society. So, it doesn’t work. 

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~ by eboro on January 29, 2009.

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