Wednesday, February 04, 2009

Financial Innovation Has Benefited Innovators And Not Investors

The recent issue of the Financial Analyst Journal published an interesting interview with John Bogle, the founder of Vanguard Group. The interview covers the current market events relating to everything from creative destruction to the trend in market turnover. The article is an interesting read.

Following are a couple excerpts from the article, Markets in Crisis (pdf):
...And another difference is visible in the trend toward ownership of securities and, particularly, stocks by institutional investors rather than individuals. Fifty years ago, individuals owned 92 percent of all stocks and financial institutions owned 8 percent. Today, individuals own only 24 percent of all stocks and institutions own 76 percent. I think a central problem is that these institutions have not behaved in an appropriate manner....

...Investment principles used to be focused on the wisdom of longterm investing rather than the folly of short-term speculation. Yet, we are witnessing an orgy of speculation in the market, the likes of which we have literally never seen in the United States. For example, in 1928, during the old speculative high, stocks had about a 140 percent annual turnover rate. In the 1950s and 1960s, when I first came into this business, turnover in the stock exchange had dropped from that speculative level to about 30 percent a year. In 2006, it rose to 200 percent. In 2007, it was 280 percent. And this year, turnover of stock is running at 320 percent. In sum, when I came into this business, there might have been two, three, or maybe four days in the course of a year in which the stock market would go up or down by 2 percentage points or more. Since the end of July 2007, there have been not two, three, or four such days; there have been 52 2-percent moves—21 upward and 31 downward....

Source:

Markets in Crisis (pdf)
Financial Analyst Journal
By: John C. Bogle and Rodney N. Sullivan, CFA
January/February 2009
http://www.cfapubs.org/doi/pdf/10.2469/faj.v65.n1.3


1 comment :

Chris said...

I agree with Bogle on this. I think it is important to realize also that the switch from individual ownership to institutional ownership of stocks let a lot of the corporate excess happen. It is very difficult for shareholders to have any control because most are in mutual funds and therefore give their voting rights to someone else.