Saturday, January 14, 2012

Investment versus Speculation

John C. Bogle, the 82-year-old founder of the mutual-fund company Vanguard Group, rails against economic inequality. Bogle, who launched the first index mutual fund in 1975, has since seen it grow into the largest fund company, managing nearly $1.7 trillion in U.S. fund assets. It has been 16 years since the investing pioneer stepped has down as CEO of Vanguard.

John C. Bogle is in the middle of writing his 10th book, The Clash of Cultures: Investment vs. Speculation. It's listed on Amazon, but as of this post, has yet to be released.

Bogle says he's been paying close attention to tax policies that he considers unfair, including one that's favorable to the mutual fund industry and investors with taxable accounts.

He points out that the top rate for dividends and long-term capital gains is historically low at 15 percent, as a result of Bush tax cuts, which Congress and President Barack Obama agreed to extend for another 2 more years in 2010. In contrast, top earners pay 35 percent on regular income. John C. Bogle doesn't like that disparity.

Here are some highlights of Bogle's complaints that he made in a recent interview this month with Mark Jewell of the Associated Press.

"I believe the rich should pay more, but that's not a good platform for tax policy. What has gone wrong is that we've failed to recognize the difference between earned income and unearned income. Is it really fair for gamblers on Wall Street to pay a 15 percent rate when they make a winning investment, and an honest working person — a bricklayer, for example — may pay an equal or higher tax on their wages than a gambler? That's absolute absurdity. Rates may have to be changed, but we also need to look at what is taxed and how. Dividend income should be taxed at the same rate as ordinary income. As for capital gains, there ought to be some distinction between capital made by people who start businesses and contribute value to society, and capital made by gamblers on Wall Street. Earned capital income should carry the regular dividend rate, but capital income gains by trading, and particularly short- term trading, should pay a higher tax, even than the present ordinary income rate."

Regarding the new book he's writing Bogle says, "Our financial system has gone off the rails. It's something we think of as providing capital for new businesses, that will enable people to finance new companies or add to the capital of existing companies. We do that to the tune of about $200 billion a year in financing through Wall Street, or through the financial system. And yet we do some $40 trillion worth of trading every year. I'm selling my investment to you, and you're buying it from me, and it creates no value for society. Indeed, it subtracts value because the guy in the middle gets his piece. Many mutual funds turn over 100 percent of their portfolios each year. When I got into this business, it was maybe 18 percent a year. It's amazing. This industry is a big part of the problem. What we need is a transfer tax on trading. We need to tame the trading and speculative element in our financial system."

In reference to the current economy John C. Bogle says, "I'm cautious. I don't expect a boom in consumer spending over the next two or three years. People don't have the wherewithal to spend a lot more, and in today's world, they don't have the confidence. Confidence can change overnight, but wherewithal cannot."

12 years ago Warren Buffett warned: "The line separating investment and speculation, which is never bright and clear, becomes blurred still further when most market participants have recently enjoyed triumphs. Nothing sedates rationality like large doses of effortless money. After a heady experience of that kind, normally sensible people drift into behavior akin to that of Cinderella at the ball. They know that overstaying the festivities — that is, continuing to speculate in companies that have gigantic valuations relative to the cash they are likely to generate in the future will eventually bring on pumpkins and mice. But they nevertheless hate to miss a single minute of what is one helluva party. Therefore, the giddy participants all plan to leave just seconds before midnight. There's a problem, though: They are dancing in a room in which the clocks have no hands." - Warren Buffett, Berkshire Hathaway 2000 Chairman's Letter

JPMorgan Chase currently has 3.8 billion in outstanding shares and the Vanguard Group is the largest institutional shareholder of JPMorgan Chase. With between $1.3 and $1.7 trillion in assets, Vanguard is the nation's largest fund company. As of 2011, here's what Vanguard owns in JPMorgan Chase:
  • Vanguard Total Stock Market Index 42.6 million shares
  • Vanguard 500 Index Investor 34.8 million shares
  • Vanguard Institutional Index Institutional 31.9 million shares
  • Vanguard Windsor II Investor 23.9 million shares
  • Vanguard Wellington Investor 20 million shares
    * Source: Morningstar

Vangaurd's CEO is F. William McNabb III. How much does he earn? "We don’t disclose the compensation earned by any crew member. We believe that compensation matters deserve the same privacy protections that we provide to shareholders and their account information."

1 comment:

  1. Today, Alan B. Krueger, the chairman of the White House’s Council of Economic Advisers, says in New York Times: "As long as the rich keep getting richer [with unnecessary tax cuts for the wealthy] and the middle class languishes, the economy as a whole will suffer. Mitt Romney, who can recite his own economic rationale for moving the country in the opposite direction, won't likely abandon his 'envy' line anytime soon."