The Clash of the Cultures

Abstract

During the recent era, the culture of short-term speculation has come to overwhelm the culture of long-term investment. The volume of transaction activity in the secondary financial markets has dwarfed the activity in the primary market where capital formation—once considered to be the principal economic mission of Wall Street—takes place. This change has been driven by many forces, including the institutionalization of stock ownership; the self-interested behavior of the financial agents who now hold 70% of all shares of U.S. stocks; the virtual disappearance of frictional trading costs (largely commissions and taxes); and the focus on the momentary illusion of stock prices rather than the eternal reality of intrinsic corporate values. The shift in the balance of mutual fund culture—from stewardship toward salesmanship—illustrates these trends and their negative impact on investors and on participation in corporate governance. Drawing on the timeless wisdom of Benjamin Graham, John Maynard Keynes, and Henry Kaufman, Bogle provides a range of recommendations that could likely foster the return to a financial system where the culture of speculation plays only a supporting role, with the starring role again played by the culture of investment.