True Measures of Money, Business, and Life
John C. Bogle
John Wiley & Sons, 2009, 276 pp., ISBN 978-0-470-39851-7
John Bogle is the 79-year old founder of the Vanguard Mutual Fund Group. In this book he reflects on the changing values of money, business, and life and points us back to the character and morals reflected in our country's founders and the world's wisdom literature.
He begins with a brief piece from the June 10, 2008 issues of the New York Times written by David Brooks. I will quote from it.
"The people who created this country built a moral structure around money. The Puritan legacy inhibited luxury and self-indulgence. Benjamin Franklin spread a practical gospel that emphasized hard work, temperance, and frugality. … Over the past 30 years, much of that has been shredded. … The institutions that encourage debt and living for the moment have been strengthened. …But the most rampant decadence today is financial decadence, the trampling of decent norms about how to use and harness money."
At a party given by a billionaire on Shelter Island, Kurt Vonnegut informs his pal, Joseph Heller, that their host…had made more money in a single day than Heller had earned from his wildly popular novel…. Heller responds, "Yes, but I have something he will never have … enough." (Introduction)
"But the rampant greed that threatens to overwhelm our financial system and corporate world runs deeper than money. Not knowing what enough is subverts our professional values." "We chase the false rabbits of success; we too often bow down at the altar of the transitory and finally meaningless and fail to cherish what is beyond calculation, indeed eternal." (2)
"In business, we place too much emphasis on what can be counted and not nearly enough on trusting and being trusted." We have too much marketing and not enough stewardship. We allow the illusory to triumph over the real. We focus too much on success and not enough on character. (23)
1. Too Much Cost, Not Enough Value
The Relentless Rules of Humble Arithmetic (3 of 4):
• The gross return generated minus the costs of the financial system equals the net return to investors.
• The more the financial system takes, the less the investor makes.
• The investor feeds at the bottom of what is a tremendously costly food chain of investing. (30)
"On balance, the financial system subtracts value from our society. Those are the modern realities of our financial system…." (30) Far too many of us don't produce anything; we're merely trading pieces of paper. (31)
When you invest for retirement, do so in a way that minimizes the extraction by the financial community: invest in low-cost U.S. and global stock market index funds. (33)
By the end of 2007, financial sector earnings had plummeted by almost half. The financial sector accounted for 90% of the S&P 500 decline in earnings for the year. Yet most investment banking executives continue to be paid at astonishingly high levels. "For the most part, what is good for the financial industry is bad for you." (35)
In 2007 the 50 highest-paid hedge fund managers together earned $29 billion. (38) Note the disconnect between cost and value in our financial system. (41) "Today, if fund managers can claim to be wizards at anything, it is in extracting money from investors."
The total costs that investors incur in our nation's system of financial intermediation come to roughly $620 billion annually. These billions are paid by investors. (44-5) Our financial system carries far too much cost and doesn't create nearly enough value for market participants. (48)
2. Too Much Speculation, Not Enough Investment
"Investing is all about the long-term ownership of businesses. Business focuses on the gradual accumulation of intrinsic value…" "Business adds value to our society, and to the wealth of our investors." (49) Speculation is the opposite. (50)
Markets driven by speculators produce high volatility. It is unhealthy for investors. The stock market is a giant distraction from the business of investing. (54)
"In the real market of business, real companies spend real money and hire real people and invest in real capital equipment, to make real products and provide real services." … "In the expectations market, by contrast, prices are set, not by the realities of business just described, but by the expectations of investors." (54)
As a total group, "Investors win; speculators lose." There is no way around it." (57) A speculative mind-set encourages investors to ignore the inevitable and discount the probability of the improbable. And then there comes a black market day. (58) "There is no reason whatsoever to expect that just because an event has never happened before, it can't happen in the future." (59)
3. Too Much Complexity, Not Enough Simplicity
Simplicity is a key to successful investing. Financial institutions favor the complex and costly. Innovation in finance is designed to benefit those who create the complex new products. The middlemen reap the rewards.
Returns from a simple, broadly diversified portfolio of stocks and bonds over a decade may be expected to average about 7 and 5 % respectively. The churn of fund innovation produces a plethora of management, advisory, and transaction fees. "Most investors would be better off in an index fund." (79)
"The most productive investing is the simplest investing, the most peaceable investing, the lowest-cost investing, the most tax-efficient investing--investing with the most consistent strategies and over the longest time horizon." (82)
4. Too Much Counting, Not Enough Trust
"Not everything that counts can be counted, and not everything that can be counted counts." (98, quoting Neil Postman)
"No business can trust everything and count nothing. Nor can any business count everything and trust nothing. It's all a question of balance…. Statistics--in charts, graphs, and tables--can be used to prove almost anything in business, but unquantifiable values have a way of holding steady as a rock." (98)
We place far too much trust in numbers. Numbers are not reality. We also rely too heavily on history and our optimistic bias leads us to misinterpret the data. We are also grossly misled by government data that badly distorts the national output (gross domestic product), unemployment and inflation.
"Our financial system has, in substance, challenged our corporations to produce earnings growth that is, in truth, unsustainable. When corporations fail to meet their numeric targets…they are compelled to do it in other ways: ways that often subtract value from you, from me, and from society." (110)
"Many companies that count (financial institutions) have acquired companies that make (production companies), and the results have been devastating. (113)
5. Too Much Business Conduct, Not Enough Professional Conduct
Our professions have gradually been subjected to a whole new set of pressures. The idea of having a calling has been undermined by potent market forces.
"The primary feature of any profession [is] to serve responsibly, selflessly, and wisely…and to establish [an] inherently ethical relationship between the professional and the general society." (122, quoting Daedalus)
The conduct of a true professional is to create value for society rather than extract it. (123)
However, professional relationships with clients have become business relationships where every user of services is a customer and every provider a seller. When the provider becomes a hammer, the customer is seen as a nail. (125)
"But as so many of our nation's proudest professions gradually shift their traditional balance away from that of trusted professions serving the interests of their clients of the community and toward that of commercial enterprises seeking competitive advantage, the human beings who rely on those services are the losers." (125)
Adam Smith wrote, "Managers of other people's money[rarely] watch over it with the same anxious vigilance with which…they watch over their own…" (129)
"In business, it seems that there is no such thing as 'enough,' while in the professions, money is, at least in the ideal, subservient to ethical standards and service to the general society. Today, compensation of our business leaders has gone through the roof. Yet it's hard to see that the CEOs of our great corporations, as a group, have added much value to the natural growth of our economy." (130) CEOs are paid with other people's money.
6. Too Much Salesmanship, Not Enough Stewardship
The fund industry has significantly changed its investment focus to equity funds (about 35% of all U.S. stocks in 2008). Fund investors don't just pick funds, they trade them. All this innovation and trading has greatly increased the costs, which constitutes a major drag on the returns earned by investors. Money managers are seeking the highest return on their own capital rather than that of their shareholders. "What is good for the fund industry is generally bad for fund shareholders." (146)
"While we drown in innovation, we starve for introspection…" (148) "What I'm ultimately looking for is an industry that is focused on stewardship--the prudent handling of other people's money solely in the interests of our investors…." (156)
7. Too Much Management, Not Enough Leadership
8. Too Much Focus on Things, Not Enough Focus on Commitment
"What are the things by which we should measure our lives?" It is easy to fall into the trap of measuring the accumulation of material things. (184) What you have may come and go but who you are--your character--will endure. (186)
"Commitment and boldness--these are among the things that truly matter, the things by which we can measure our lives…." (189)
9. Too Many Twenty-First-Century Values, Not Enough Eighteenth-Century Values
"Soon we shall know everything the 18th century didn't know, and nothing that it did, and it will be hard to live with us." (194, quoting Neil Postman)
"I would argue that we have moved away from truth…to truthiness, the presentation of ideas and numbers that convey neither more nor less than what we wish to believe in our own self-interest, and persuade others to believe, too." (195)
"…we are surrounded by information, but increasingly cut off from knowledge. Facts (or, more often, factoids) are everywhere. But wisdom--the kind of wisdom that was rife in the age of this nation's Founding Fathers--is in short supply." (195)
"To paraphrase Neil Postman's essential message, soon we shall know everything that doesn't count, and nothing that does." (196)
10. Too Much "Success," Not Enough Character
From a New York Times essay in November 2004 by David Brooks
"Highly educated young people are tutored, taught, and monitored in all aspects of their lives, except the most important, which is character-building. But without character and courage, nothing else lasts." (221-22)
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