Another example of why John Bogle is my hero

[REWahoo]

Why 99% of trading is pointless: John Bogle

"The job of finance is to provide capital to companies. We do it to the tune of $250 billion a year in IPOs and secondary offerings," Bogle told Time in an interview.

"What else do we do? We encourage investors to trade about $32 trillion a year. So the way I calculate it, 99% of what we do in this industry is people trading with one another, with a gain only to the middleman. It's a waste of resources."

 

[ERD50]

with a gain only to the middleman. It's a waste of resources."

Unless you are the middleman!


-ERD50

 

[bclover]

Unless you are the middleman!


-ERD50

+1

Hey they have to eat also.

 

[Texas Proud]

Yes... a great article and a great point....

 

[mickeyd]

If you're a normal retirement investor trying to get from A to B and retire
on time, well, you have a really big problem to face: The toll-taker wants your
money.

I'm as normal as the next guy yet I know how to avoid the toll-takers. So does everyone here.

 

[DEC-1982]

Nice article.

 

[Totoro]

Unless you are the middle man (broker platform).

Unless you are the front man (?) (high frequency trader).

Unless you are the running man (?) (hedge fund type investment manager)

Unless you are the tax man (short terms capital gains)

I'm probably missing a few good men.

 

[Gumby]

I'm probably missing a few good men.

That's because you can't handle the truth.

 

[Pecan518]

Hello All. I'm a long time lurker and this is my first message.

First, let me say I agree with the sentiment of John Bogle's statement. But I do want to point out one very important benefit additional trading has over and above the initial capital placed with firms. The trading allows investors to earn higher returns (than say a bank account) and still access their money later when they want to. Imagine if the only trading was with firms (IPOs, SECs, and share repurchases) (i.e., when firms raise capital or return capital). In that case when I get paid and want to invest my money, I can only buy stock in a firm if it is selling new shares right at that moment. In addition, I can only get money back from my investment if that firm decides to pay dividends or repurchases shares.

I do think John Bogle is correct in the idea that Wall Street makes lots of money from trading and wants to encourage investors to trade for their own benefit. But it is also true investors do get some benefit from having a liquid market so they can invest and then access their investment at a time of their choosing. Besides the 1% or trading that is used to raise capital, I'm not sure how much more is "good" trading vs. churning. It might be just another 1%, but it is something and without this function of the markets, I think many of us would have a hard time retiring early.

 

[samclem]

One thing that can reduce the loss from "friction"--buy stock in "the middleman" and get your share of the action.
​

 

[2020Vision]

This is interesting. So let's see what we would be doing with the 32 trillion instead of shuffling it back and fourth for nothing. Is this an indictment on entrepreneurship that only 1% goes towards capital finance? Don't we have enough viable business ventures that could make better use of some of that capital?

Sent from my XT1019 using Early Retirement Forum mobile app

 

[explanade]

OTOH, without all that trading activity which boosts valuations, would most of us here have FIRE'd?

 

[sengsational]

I'm not so sure one would need that many trades to get a valuation, though. But does the increased liquidity generated by speculators help the infrequent traders? They're not putting the broker's kids through Harvard.

 

[heyyou]

I'm not so sure one would need that many trades to get a valuation, though. But does the increased liquidity generated by speculators help the infrequent traders?

Well said. Who cares if it is one or two or ten percent? The point is that most trading is speculation, not investing. The horse race track employs people, but no one is confused about the purpose of its existence which is not about testing the breeding and training of horses. Is the stock market any different?

 

[sengsational]

I'd say it's sanctioned gambling, for the most part. Probably what Jack was getting at.

 

[Rickt]

Staying put is really hard to do for most people. That's why I keep a small portion (5%) for trading.

 

[Spanky]

OTOH, without all that trading activity which boosts valuations, would most of us here have FIRE'd?

it can lead to market crashes also.

 

[Spanky]

Staying put is really hard to do for most people. That's why I keep a small portion (5%) for trading.

Not difficult at all! I have zero portion for any kind of trading. There are so many other things to do for fun. Trading (or gambling) is not one of them.

 

[HFWR]

Frequent traders are in a different business than investors.

 

[nash031]

But investors benefit from the existence of frequent traders...

 

[sengsational]

it can lead to market crashes also.

Buying (rebalancing) opportunity.

But investors benefit from the existence of frequent traders...

+1

 

[haha]

I have zero portion for any kind of trading. There are so many other things to do for fun. Trading (or gambling) is not one of them.

Clearly everyone agrees with you. That is why there is hardly any trading anymore.

Ha

 

[NW-Bound]

Let's pass a law banning stock trading. When you buy stocks of a company, it will be for life. Your life or the company life, whichever ends first.

So, if you happen to buy a hot stock like Apple, how do you cash out if you cannot sell? No, you don't. What if you think the company is about to go bankrupt? So, you save your skin at the expense of the dumb guy who buys the lousy stock from you? Nope, not allowed. You own it forever, for better or for worse.

OK, maybe we will let you sell, but as a deterrence, let's tax capital gain at 50%. That will teach you. You cry out "What capital gain, I am losing money". Well, we will just tax 25% of the proceed, if you have no gain.

That will slow traders down.

 

[Mulligan]

Not difficult at all! I have zero portion for any kind of trading. There are so many other things to do for fun. Trading (or gambling) is not one of them.

Hmm, I need to go see a shrink, as gambling (lessor degree trading) is by far my most favorite thing to do for fun. After 40 years of it, you think it would have gotten old. But it is just as fun today as it has ever been.


Sent from my iPad using Tapatalk

 

[imoldernu]

Hello All. I'm a long time lurker and this is my first message.

First, let me say I agree with the sentiment of John Bogle's statement. But I do want to point out one very important benefit additional trading has over and above the initial capital placed with firms. The trading allows investors to earn higher returns (than say a bank account) and still access their money later when they want to. Imagine if the only trading was with firms (IPOs, SECs, and share repurchases) (i.e., when firms raise capital or return capital). In that case when I get paid and want to invest my money, I can only buy stock in a firm if it is selling new shares right at that moment. In addition, I can only get money back from my investment if that firm decides to pay dividends or repurchases shares.

I do think John Bogle is correct in the idea that Wall Street makes lots of money from trading and wants to encourage investors to trade for their own benefit. But it is also true investors do get some benefit from having a liquid market so they can invest and then access their investment at a time of their choosing. Besides the 1% or trading that is used to raise capital, I'm not sure how much more is "good" trading vs. churning. It might be just another 1%, but it is something and without this function of the markets, I think many of us would have a hard time retiring early.

Well said.