The Clash of the Cultures: Investment vs. Speculation
John C. Bogle
Format: PDF / Kindle (mobi) / ePub
Recommended Reading by Warren Buffet in his March 2013 Letter to Shareholders
How speculation has come to dominate investment—a hard-hitting look from the creator of the first index fund.
Over the course of his sixty-year career in the mutual fund industry, Vanguard Group founder John C. Bogle has witnessed a massive shift in the culture of the financial sector. The prudent, value-adding culture of long-term investment has been crowded out by an aggressive, value-destroying culture of short-term speculation. Mr. Bogle has not been merely an eye-witness to these changes, but one of the financial sector’s most active participants. In The Clash of the Cultures, he urges a return to the common sense principles of long-term investing.
Provocative and refreshingly candid, this book discusses Mr. Bogle's views on the changing culture in the mutual fund industry, how speculation has invaded our national retirement system, the failure of our institutional money managers to effectively participate in corporate governance, and the need for a federal standard of fiduciary duty.
Mr. Bogle recounts the history of the index mutual fund, how he created it, and how exchange-traded index funds have altered its original concept of long-term investing. He also presents a first-hand history of Wellington Fund, a real-world case study on the success of investment and the failure of speculation. The book concludes with ten simple rules that will help investors meet their financial goals. Here, he presents a common sense strategy that "may not be the best strategy ever devised. But the number of strategies that are worse is infinite."
The Clash of the Cultures: Investment vs. Speculation completes the trilogy of best-selling books, beginning with Bogle on Investing: The First 50 Years (2001) and Don't Count on It! (2011)
direction—took place in 1935, with reserves rising from 2 percent in mid-year to 22 percent by year-end. Just before World War II broke out, reserves totaled 15 percent, but by the time the subsequent market drop was over, they had been cut to 6 percent. Some of these substantial changes in allocation were timely and successful; some were not. But what was easily accomplished up until 1949, when Fund assets were generally below $100 million7 (almost $1 billion in today’s dollars), was less
we can examine the change in dividend income. Let us assume, for the purposes of argument, that we were to accept in toto the idea that Wellington Fund’s income stocks could provide a current yield of about 6.6 percent,12 with a projected dividend growth of 52 percent over the next four years (based on Value Line projections), and without material sacrifice to the Fund’s total (income-plus-growth) return. What kind of current and future income might we be able to generate? Here are the
projections in my memo—almost to the penny. Relative to Wellington’s average net asset value of $12.39 in 1983, that $.92 payment happened to represent a dividend yield of 7.4 percent for the fund. (Those were the long-gone days of generous yields on both bonds and stocks. Today the Fund’s yield is 2.5 percent.) This new strategy had obviated the need ever to return to the old (and discredited by experience) “Six Percent Solution.” Wellington Management Does the Job Portfolio manager Vin
Appendix I with a similar study completed five years ago, for example, 16 of the 17 fund groups with the highest positive scores remained in positive territory during the past decade and 10 of the 15 groups with the highest negative scores remained in negative territory. Likelihood of Change Unfortunately, a federal mandate requiring the internalization of large mutual fund groups is not a realistic goal. (The SEC considered such a change in 1960, in the report “Public Policy Implications
segments, and on the momentary movements of stock prices. Appendix VII presents the growth in the number of funds and assets of these two distinctly different approaches to the principles of indexing. In sum, long-term investment has been the major driver of the TIF business. Short-term speculation has become the major driver of the ETF business. While broad-market ETFs can easily and beneficially be used by long-term investors—they may even compare favorably with their comparable TIF cousins in