The rampant greed that threatens to overwhelm our financial system and corporate world runs deeper than money, rues John C. Bogle in ‘Enough.’ (www.wiley.com). Not knowing what ‘enough’ is subverts our professional values, he adds. “It makes salespersons of those who should be fiduciaries of the investments entrusted to them. It turns a system that should be built on trust into one with counting as its foundation.”
Worse, says Bogle, the confusion about enough leads us astray in our larger lives, making us chase the false rabbits of success, and often bow down at the altar of the transitory and finally meaningless, failing to cherish what is beyond calculation, indeed eternal.
The intro opens with an anecdote from a party given by a billionaire hedge fund manager. When Joseph Heller, a guest, was told that the host made more money in a single day than Heller had earned from his wildly popular novel ‘Catch-22’ over its whole history, Heller’s response was simple: “Yes, but I have something he will never have… enough.”
Drawing inspiration from that, Bogle notes that the US financial system focuses on the returns that the financial markets may deliver ignoring the exorbitant costs extracted by the financial system, be they in the form of excessive taxes engendered by record levels of speculative trading or inflation borne of a government that spends money beyond its means.
He is unhappy that false notions of personal satisfaction blind us to the real sense of calling that gives work meaning for ourselves, our communities, and our society. “We focus too much on things and not enough on the intangibles that make things worthwhile; too much on success (a word I’ve never liked) and not enough on character, without which success is meaningless.”
Work, trade, finance
The first chapter, titled ‘Too much cost, not enough value,’ begins with an old epigram from nineteenth-century Great Britain, which defines a few key words, thus: “Some men wrest a living from nature and with their hands; this is called work. Some men wrest a living from those who wrest a living from nature and with their hands; this is called trade. Some men wrest a living from those who wrest a living from those who wrest a living from nature and with their hands; this is called finance.”
Over time, we have moved to a world where far too many of us seemingly no longer make anything, frets Bogle. We are merely trading pieces of paper, swapping stocks and bonds back and forth with one another, and paying our financial croupiers a veritable fortune, he continues. “In the process, we have inevitably added even more costs by creating ever more complex financial derivatives in which huge and unfathomable risks have been built into the financial system.”
An apt quote of Charlie Munger is about the worrying trend of young talent getting attracted into lucrative money-management and its attendant modern frictions, as distinguished from work providing much more value to others.
Food chain of investing
Going by the relentless rule of humble arithmetic, Bogle reminds that the gross return generated in the financial markets minus the costs of the financial system, equals the net return actually delivered to investors; and that the investor feeds at the bottom of what is today the tremendously costly food chain of investing.
Our financial system does create substantial value for our society, he concedes. “It facilitates the optimal allocation of capital among a variety of users; it enables buyers and sellers to meet efficiently; it provides remarkable liquidity; it enhances the ability of investors to capitalise on the discounted value of future cash flows, and other investors to acquire the right to those cash flows; it creates financial instruments (often including so-called derivatives, often of mind-boggling complexity, whose values are derived from still other financial instruments) that enable investors to assume additional risks, or to divest themselves of a variety of risks by transferring those risks to others.”
Yet, on the whole, the costs of obtaining those benefits have reached a level that overwhelms the positives, bemoans Bogle. He avers that the financial system – fraught with information asymmetry (which favours sellers over buyers), imperfect competition, and irrational choices driven by emotions rather than reason – leaves the investors in the aggregate far from getting what they pay for.
Distressed by the fact that financial economy subtracts value from the society by undoing the gains achieved by productive businesses the author calls for studies that systematically attempt to calculate the value extracted by the financial system from the returns earned by investors. The veil of ignorance must be lifted, and we need to find ways to radically improve the system of capital formation through some combination of education, disclosure, regulation, and structural and legal reform, he urges.
Investment vs speculation
An instructive chapter in the book distinguishes between investment and speculation. Investing is all about the long-term ownership of businesses, writes Bogle. “Business focuses on the gradual accumulation of intrinsic value, derived from the ability of our publicly-owned corporations to produce the goods and services that our consumers and savers demand, to compete effectively, to thrive on entrepreneurship, and to capitalise on change. Business adds value to our society, and to the wealth of our investors.”
Speculation, he says, is the precisely the opposite, because it is all about the short-term trading, not long-term holding, of financial instruments – pieces of paper, not businesses – largely focused on the belief that their prices, as distinct from their intrinsic values, will rise. A cautionary quote of John Maynard Keynes, mentioned in the book, is that when enterprise becomes a mere bubble on a whirlpool of speculation and the capital development of a country becomes a by-product of the activities of a casino, the job of capitalism is likely to be ill-done.
Observes Bogle that when our market participants are largely investors, focused on the economics of business, the underlying power of our corporations to earn a solid return on the capital invested by their owners is what drives the stock market, and the volatility is low.
In contrast, when our markets are driven, as they are today, largely by speculators, by expectations, by hope, greed, and fear, the inevitably counterproductive swings in the emotions of market participants – from the ebullience of optimism to the blackness of pessimism – produce high volatility, and the resultant turbulence as now being witnessed become almost inevitable, he warns.
Rather than veering totally to one side, the author argues for a balance between speculators (financial entrepreneurs, traders, and short-term traders, risk takers restlessly searching to exploit anomalies and imperfections in the market for profitable advantage) and investors (financial conservatives, long-term owners of stocks who hold in high esteem the traditional values of prudence, stability, safety, and soundness). Today’s powerful and debilitating turmoil is one of the prices we pay for allowing that balance to get out of hand, he laments.
Recommended study, to realise how expansive enough can get.