Too Much Cost, Not Enough Value

In a commencement speech at Georgetown University in May 2007, at the very peak of the boom in the financial sector, John Bogle had this say on this subject:

One, if you enter the financial field, do so with your eyes wide open, recognizing that any endeavour that extracts value from its clients may, in times more troubled than these, find that it has been hoist by its own petard. It is said on Wall Street, correctly, that “money has no conscience,” but don’t allow that truism to let you ignore your own conscience, nor to alter your own conduct and character.

Two, when you begin to invest so that you will have enough for your own retirement many decades hence, do so in a way that minimizes the extraction by the financial community of the returns generated by business. This is, yes, a sort of self-serving recommendation to invest in low-cost U.S. and global stock market index funds (the Vanguard model), but doing so is the only way to guarantee your fair share of whatever returns our financial markets are generous enough to provide.

Three, no matter what career you choose, do your best to hold high its traditional professional values, now swiftly eroding, in which serving the client is always the highest priority. And don’t ignore the greater good of your community, your nation, and your world. As William Penn pointed out, “We pass through this world but once, so do now any good you can do, and show now any kindness you can show, for we shall not pass this way again.

The costs of our financial system today are so high largely because we have abandoned the traditional standards of investing, well described by the words of the legendary Benjamin Graham, as they appeared in the Financial Analysts journal of May-June 1963:

It is my basic thesis – for the future as for the past – that an intelligent and well-trained financial analyst can do a useful job as portfolio adviser for many different kinds of people, and thus amply justify his existence. Also I claim he can do this by adhering to relatively simple principles of sound investment; e.g., a proper balance between bonds and stocks; proper diversification; selection of a representative list; discouragement of speculative operations not suited for the client’s financial position or temperament – and for this he does not need to be a wizard in picking winners from the stock list or in foretelling market movements.

In June 2007, the valedictorian and economics major in Princeton University Glen Weyl described his passion for intellectual inquiry in this way: “There are questions so important that it is, or should be, hard to think about anything else.” The efficient functioning of our nation’s flawed system of financial intermediation is just such a question.

It’s high time not only to think about this question, but to study it in depth, to calculate its costs, and to relate those costs to the values that investors not only expect to earn, but are entitled to earn. Our financial system carries quite enough cost – in fact, far too much cost – and therefore doesn’t create nearly enough value for market participants. Finance indeed wrests its living from those who wrest their livings from nature, from commerce, and from trade. It is essential that we demand that the financial sector function far more effectively in the public interest and in the interest of investors that it does today.