Couple of questions about passages from Bogle's book "Enough"

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arcticpineapplecorp.
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Couple of questions about passages from Bogle's book "Enough"

Post by arcticpineapplecorp. » Thu May 24, 2018 8:31 pm

I just picked up a copy of Bogle's book "Enough" at our library book sale this week (dirt cheap, very bogleheadish). I'm only 75 pages in but I've already had a learned so much. There are two questions I have and I thought I'd ask for your take on it (whether you've read it or not). I also was not aware of the the exchanges between Vanguard and the SEC upon Vanguard's formation so I thought I'd share that with you (I had not read this before).

on page 45 he writes,
The system is fraught with information asymmetry (which favors sellers over buyers)...
Unfortunately, he didn't expound on this point and it left me wondering what he meant. Can someone explain how sellers have the upper-hand over buyers in the stock market?

Regarding the early days Jack writes on page 19:
Believe it or not, after a tedious weeklong regulatory hearing, the SEC staff ruled against our unprecedented plan. Aghast, for I knew that what we were doing was right for investors, we mounted a vigorous appeal and --after a struggle that laster four long years--triumphed at last in 1981, when the SEC did an about-face and at last approved our plan. The Commission did so whith a rhetorical flourish that concluded with these words:

The Vanguard plan...actually furthers the [1940 Investment Company] Act's objectives,...fosters improved disclosure to shareholders...clearly enhances the Funds' independence, [and] promotes a healthy and viable mutual fund complex within which each fund can better prosper.

In every respect, the Commission's parting salute was to prove prescient.
Does anyone know why the SEC first "ruled against" Vanguard's plan? What was their initial objections that Vanguard convinced them were not valid?

Also, what was approved in 1981 by the SEC? The structure of Vanguard as a mutual mutual fund company or something else?

Thanks for any feedback you provide! And I recommend the book so far!
"Invest we must." -- Jack Bogle | “The purpose of investing is not to simply optimise returns and make yourself rich. The purpose is not to die poor.” -- William Bernstein

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Re: Couple of questions about passages from Bogle's book "Enough"

Post by arcticpineapplecorp. » Fri May 25, 2018 6:58 pm

just bumping to see if there were any thoughts on my couple of questions. thanks!
"Invest we must." -- Jack Bogle | “The purpose of investing is not to simply optimise returns and make yourself rich. The purpose is not to die poor.” -- William Bernstein

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Re: Couple of questions about passages from Bogle's book "Enough"

Post by pkcrafter » Fri May 25, 2018 7:25 pm

I think these references will address the first question.
In his new book, "Enough: True Measures of Money, Business, and Life," he cites what might be an investment banker's view of the national economic crisis: "The bad news is that we lost a ton of money. The good news is that none of it was ours."
https://www.cbsnews.com/news/vanguards- ... tors-last/
Mr. BOGLE: Well, I started to look at what was going on in our financial system, and to be honest, Alison, I got outraged. I did some research and found out the financial system costs $600 billion a year. And that means whatever the markets deliver, we investors get $600 billion less because we pay it to this institution or this series of institutions, mutual fund managers, hedge fund managers, stock brokers, investment bankers that we call, loosely, Wall Street.


https://www.npr.org/templates/story/sto ... d=96432098

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Re: Couple of questions about passages from Bogle's book "Enough"

Post by billfromct » Fri May 25, 2018 7:39 pm

I'm a little confused. What "unprecented plan" is John Bogle talking about?

I believe that Vanguard came into existence around 1976 & started the S&P 500 index fund about the same time.

What would a 1981 SEC ruling allow Vanguard to do that Vanguard had or hadn't been doing since 1976?

bill

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Re: Couple of questions about passages from Bogle's book "Enough"

Post by pkcrafter » Fri May 25, 2018 8:22 pm

When times are good, investors tend to forget about risk and focus on opportunity. When times are bad, investors tend to forget about opportunity and focus on risk.

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Re: Couple of questions about passages from Bogle's book "Enough"

Post by arcticpineapplecorp. » Fri May 25, 2018 9:13 pm

Thanks very much Paul. I read both articles (will read through the SEC filing tomorrow. I appreciate that link, didn't think to search it myself) but I still don't understand what he meant exactly about asymmetric information favoring sellers over buyers. I read the two articles and while I agree walll street always has a new "better" product to sell, I don't see how that is asymmetric and how sellers have the upper hand over buyers. To be asymmetric doesn't it mean one side has to know something the other doesn't?
Banks, insurance companies, brokerage firms, and mutual fund companies all are sophisticated profit maximizers, as you'd expect in a capitalist system. Their job is to look after shareholders, not to look after you.

"They have a large incentive to favor the complex and the costly over the simple and cheap, quite the opposite of what most investors need and ought to want," Bogle says...

The industry today has more in common with the fashion business than with traditional, long-term investing. Are tech stocks selling? New tech funds pour into the market. Are you scared of stocks? New types of costly, "no-lose" investments proliferate. It's a classic sales strategy: "If the man wants a blue suit, turn on the blue light."

The lure of fashion diminishes your returns. In the 25 years that the average equity fund was posting 10 percent, investors in those funds earned only 7.5 percent. That's because they hopped from fund to fund, buying into high performers just in time to catch their cycle down. Restlessness, like costs, can demolish your investment dreams.
Is that really information asymmetry? I don't see it that way, but was that what he was referring to?
"Invest we must." -- Jack Bogle | “The purpose of investing is not to simply optimise returns and make yourself rich. The purpose is not to die poor.” -- William Bernstein

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Re: Couple of questions about passages from Bogle's book "Enough"

Post by pkcrafter » Fri May 25, 2018 10:52 pm

I think this is what Mr. Bogle is referring to: Information asymmetry: sellers know a lot of things that the buyers don't know.

-or this from Meir Statman -
markets are rather hard-to-beat for investors lacking exclusive or narrowly-available information. And behavioral finance elucidates the cognitive and emotional errors that mislead investors with nothing but widely-available information into the belief that markets are easy to beat.

If you play the market you are either playing with people like you who don't know anything, so it's a wash, or you are playing with people who have exclusive or narrowly-available information and the odds of a winning trade heavily stacked against you.

http://jpm.iijournals.com/content/44/3/76

Paul
Last edited by pkcrafter on Sat May 26, 2018 9:57 am, edited 1 time in total.
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Re: Couple of questions about passages from Bogle's book "Enough"

Post by bertilak » Sat May 26, 2018 7:18 am

pkcrafter wrote:
Fri May 25, 2018 10:52 pm
If you play the market you are either playing with people like you who don't know anything, so it's a wash, or you are playing with people who have exclusive or narrowly-available and the odds of a winning trade heavily stacked against you.
BUT ... The people with "exclusive or narrowly-available [information]" might be buyers or sellers. What give sellers the edge? That was the OP's question:
arcticpineapplecorp. wrote:
Thu May 24, 2018 8:31 pm
Bogle, in his book "Enough" wrote:The system is fraught with information asymmetry (which favors sellers over buyers)...
Unfortunately, he didn't expound on this point and it left me wondering what he meant. Can someone explain how sellers have the upper-hand over buyers in the stock market?
An answer MIGHT be that investment products (active funds, advice, management, exotic or complex investment schemes) are where sellers of those products have the upper hand.
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Re: Couple of questions about passages from Bogle's book "Enough"

Post by UpperNwGuy » Sat May 26, 2018 7:35 am

arcticpineapplecorp. wrote:
Thu May 24, 2018 8:31 pm
Does anyone know why the SEC first "ruled against" Vanguard's plan? What was their initial objections that Vanguard convinced them were not valid?
I think a lot of the SEC objections related to the fact that SEC members came from the senior ranks of the Wall Street firms, and they didn't want to undercut their former firms. I believe something similar happened with the formation of Schwab as the first "discount brokerage." Lots of initial opposition from the SEC.

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Re: Couple of questions about passages from Bogle's book "Enough"

Post by arcticpineapplecorp. » Sat May 26, 2018 7:39 am

thanks everyone for your replies. That helps explain it. I think I'm understanding more now.
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Re: Couple of questions about passages from Bogle's book "Enough"

Post by aspirit » Sat May 26, 2018 8:02 am

Heres a passing thought to add another perspective to your question, in the old days (say 50yrs. ago) it was primarily you and & I trading w/each other. We both have access to the same information. Today its primarily trading institutions trading w/ea. other.

These days, my understanding is, the odds favor trading institutions because it's their job to buy/sell. More buy/sell orders are orchestrated by 'professionals' or trading institutions with access to better* information. If trading is your primary income stream, your obviously going to be more proficient than most other traders.

Heres an analogy someone used that resonated w/me decades back.
"Consider yourself the only novice actually on the ice during a hockey game trying to play along". :wink: Or something like that.

I read that book a while back also, I think its time to read it again.
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Re: Couple of questions about passages from Bogle's book "Enough"

Post by dbr » Sat May 26, 2018 8:20 am

I still don't understand why it is sellers that have an information advantage and buyers that do not. Who does Mr. Bogle refer to when he talks about sellers vis-a-vis buyers? Every transaction on a market has a buyer and a seller and financial professionals are both buyers and sellers all the time.

To me this is just another one of Mr. Bogle's misspeaks that we can't understand because we don't have a context.

More than that, Boglehead investors are both buyers and sellers as we go through accumulation of savings and spending savings for income at some point in time. Does that mean that when we are retired we can enjoy some mysterious advantage we didn't have when we were working?

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Re: Couple of questions about passages from Bogle's book "Enough"

Post by JoMoney » Sat May 26, 2018 8:36 am

I would say it's information asymmetry when there are fees and commissions that are less than transparent, when a buyer gets "advice" from a broker/adviser selling a product with incentives to the seller that aren't fully understood.
When a person with money meets a person with experience, the person with the experience winds up with the money and the person with the money winds up with the experience.
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Re: Couple of questions about passages from Bogle's book "Enough"

Post by mike_in_ny » Sat May 26, 2018 8:47 am

I don't think that he's talking about the buy/sell of a stock when he refers to the asymmetry.
I think he's talking about Wall Street "products."

The best example I can think of for this is an annuity. The buyer has only a fraction of
the understanding of the contract that the seller has put together.

It would also apply to a mutual fund and would include how much trading costs really are,
after discounts/rebates, how the manager is compensated in detail (that might influence
their trading, etc.).

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Re: Couple of questions about passages from Bogle's book "Enough"

Post by vineviz » Sat May 26, 2018 8:53 am

Here’s an excerpt from a speech where he elaborated a little more:
How else to explain the disgraceful conduct of so many of the oldest, largest, and once most respected management companies in this industry—now representing $2 trillion of fund assets, almost 30 percent of the total—in aiding and abetting illicit market timing schemes. Or the number of leading brokerage firms engaged in “breakpoint” frauds in which excessive sales loads were imposed on investors. Or having one of the bluest of the industry’s blue-chip firms—one of the three largest firms our field—violate NASD rules by allocating brokerage commissions as a quid pro quo to brokers that sold the shares of its funds. What’s more, according to the NASD decision, the firm’s executives were duplicitous on the witness stand. (The actual word was “disingenuous.”) While the examiner recommended a $100 million fine, it was reduced to $5 million on the grounds that the illicit practice was rife in the industry (i.e., “everyone else was doing it, so I can too.”)

Together, this disgraceful conduct represents a sorry chapter in this industry history. But I know of no easy way to regulate or legislate a return to our industry’s traditional values. Competition, in fact, is driving us in quite the opposite direction. As long as our industry participants—our fund managers and marketers, our brokerage firm account executives, and our financial advisers—have more information at hand than their clients possibly could—the economists call this information asymmetry—a largely unaware investment public will be inadequately informed. Regulations calling for more complete disclosure would be a huge help in protecting investors from their own naiveté and lack of information.
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Re: Couple of questions about passages from Bogle's book "Enough"

Post by alpine_boglehead » Sat May 26, 2018 9:15 am

mike_in_ny wrote:
Sat May 26, 2018 8:47 am
I don't think that he's talking about the buy/sell of a stock when he refers to the asymmetry.
I think he's talking about Wall Street "products."

The best example I can think of for this is an annuity. The buyer has only a fraction of
the understanding of the contract that the seller has put together.

It would also apply to a mutual fund and would include how much trading costs really are,
after discounts/rebates, how the manager is compensated in detail (that might influence
their trading, etc.).
Barring the use of insider information, a stock trade is kind of a neutral exchange. You get exactly what the stock is priced at the moment. What afterwards happens the value of the stock is anyone's guess.

So I'd also say it was meant in the sense of caveat emptor. Think of the repackaging of subprime mortgages into high-yielding "safe" products.

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Re: Couple of questions about passages from Bogle's book "Enough"

Post by dbr » Sat May 26, 2018 9:39 am

So I went and bought the book just to try to figure out what he is talking about.

My conclusion is that the discussion is so general that a reader has no chance to understand what it is that is being bought and sold to which "information asymmetry" can be applied in that sentence. The text reads like a rant, albeit however justified, more than as an informative analysis. As far as I can tell from the context the issue is that retail customers of financial products such as shares of a mutual fund do not understand how much they are paying in costs because those costs are not made explicit and may be hard to determine unless an informed person looks very closely. Naturally the operators of mutual funds that have such costs are fully informed what they are. I guess that is information asymmetry not unlike the similar issue faced by a person negotiating with a dealer over the price of a car or a contractor on the construction of a house. The answer, of course, is exactly the answer implemented by Mr. Bogle, which is to compete with a lower cost product.

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Quotes from "Enough" A Gem

Post by Taylor Larimore » Sat May 26, 2018 12:44 pm

Bogleheads:

"Enough," written in 2009, is one of my favorite Bogle books. Jack is an example of knowing what is "enough."

Below are excerpts:
At a party give by a billionaire, Kurt Vonnegut informs his pal, Josepth Heller, that their host, a hedge fund manager, had made more money in a single day than Heller had earned from his wildly popular novel Catch-22 over its whole history. Heller responds, 'Yes, but I have something he will never have...enough."

"Not knowing what enough is, subverts our professional values. It makes salespersons of those who should be fiduciaries of the investments entrusted to them."

"I grew up with the priceless advantage of having to work for what I got."

"On February 21, 1996, I at last received my new heart.--One more reason why I am convinced that I have received more blessings than any other human being on the face of the earth."

"I've developed a profound concern that our society is moving in the wrong direction."

"We ignore the real diamonds of simplicity, seeking instead the illusory rhinestones of complexity."

"We have more than enough of the fool's gold of marketing and salesmanship and not enough of the real gold of trusteeshiip and stewardship."

"The more the financial system takes, the less the investor makes. The investor feeds at the bottom of what is today the tremendously costly food chain of investing."

"In 2007 alone, the 50 highest-paid hedge fund manager together earned $29 billion (yes, billion). If you didn't make $360 million in that single year, you didn't even crack the top 25."

"I passionately subscribe to these simple principles of balance, diversification, and focus on the long term."

"Today, if fund managers can claim to be wizards at anything, it is in extracting money from investors. In 2007, the direct costs of the mutual fund system totaled more than $100 billion year after year paid by the investors themselves."

"Over the past two centuries, our nation has moved from an agricultural economy to a manufacturing economy, to a service economy, and now to a predominantly financial economy."

"It is essential that we demand that the financial sector function far more effectively in the public interest and in the interest of investors than it does today."

"When I first came into the financial field in 1951, the annual rate of turnover of stocks was running at about 25%. Yet by last year, stock turnover had shot up to 215%."

"In the financial markets, the improbable is, in fact, highly probable."

"While there have been numerous black swans in our short-term-oriented and speculative financial markets, there have been no black swans in the long-term returns generated by U.S. stocks."

"In investing, tortoises tend to win far more often than hares over the turns of the market cycle." (Peter Bernstein, quote)

"Heck, I don't even know anyone who knows anyone who has timed the market with consistent, successful, and replicable results."

"For me, simplicity has always been the key to successful investing."

"Financial institutions have a large incentive to favor the complex and costly over the simple and cheap."

"The notional principal value of all derivatives is almost beyond imagination--some $600 trillion, nearly 10 time the $66 trillion gross domestic product of the entire world."

"Fidelity's remarkable Peter Lynch declared, 'Most investor would be better off in an index fund.' He was right!"

"Wall Street's perennial advice to its clients: 'Don't just stand there. Do something!'"

"During the 25 years ended 2005, the average equity fund reported an annual rate of return of 10%--trailing the 12.3% return of an S&P 500 Index Fund."

"I've been lucky enough to have played a key role in a number of innovations: the stock index fund, the bond index fund, the defined-maturity bond fund, the tax-managed fund, and even the first fund-of-funds."

"Nobel Laureate, economist Paul Samuelson called the first index mutual fund the equivalent of the invention of the wheel and the alphabet."

"ETFs used for investment are perfectly sound, but using them for speculation is apt to end badly for investors."

"As the Oracle of Omaha (Warren Buffett) sometimes expresses it, 'There are three i's in every cycle: first the innovator, then the imitator, and finally the idiot.'"

"My long experience warns that it's all too counterproductive for investors to jump on the bandwagon of superior past performance."

"Mark me down, too, as an index fundamentalist, a passionate believer that the simplicity of the original index fund design--highly diversified portfolio of stocks weighted by their market capitalizations--continues to represent the gold standard for investors."

"Not everything that counts can be counted, and not everything that can be counted counts."

"By worshiping at the altar of numbers and by discounting the immeasurable (trust, wisdom, character, ethical values), we have in effect created a numeric economy that can easily undermine the real one."

"That's the trouble with complex calculations: They can't be trusted to convey simple truths."

"For God's sake, let's always keep Vanguard a place where judgment has at least a fighting chance to triumph over process."

"If you do not have integrity, no one will trust you, nor should they."

"The 2003 failure of Arthur Anderson, and the earlier bankruptcy of its client Enron, was but one dramatic example of the consequences of this conflict-riddled relationship."

"Since 1950, direct ownership of U.S. stocks by individual investors has plummeted from 92% to 26%"

"In 1980 the compensation of the average chief executive officer was 42 time that of the average worker. Since then it has risen to 520 times."

"Until we pay CEOs on the basis of corporate performance rather than on the basis of corporate peers, CEO pay will, almost inevitably, continue on its upward path."

"In 1951, mutual fund assets totaled $2 billion. Today, assets total more than $12 trillion."

"The challenge to investors in picking funds has become almost equivalent to the challenge in picking individual stocks."

"The 10% annual return of the average fund over 25 years was 37% higher than the 7.3% return earned by fund shareholders (who traded)."

"A star system among mutual fund managers has evolved, with all the attendant hoopla, encouraging hyperactivity by fund investors--but most of these stars have turned out to be comets."

"In 1951, the typical mutual fund focused on the wisdom of long-term investing, holding the average stock in its portfolio for about six years. Today the holding period for a stock for actively managed equity funds is just one year."

"My dream is to design a new industry in which we give our investors a fair shake in terms of costs."

"Nearly 2,800 of the 6,126 mutual fund that existed in 2001 are already dead and gone."

"What I'm ultimately looking for is an industry that is focused on stewardship--the prudent handling of other people's money solely in the interest of our investors."

"Both leaders and managers must learn to view those who work with them--from the highest to the humblest--not just as pawns on a corporate chessboard, but as human beings with the same needs and concerns that all of us have."

"As head of Vanguard, I proposed a single overarching but simple rule: 'Do what's right. If you're not sure, ask your boss.'"

"If you want to be trusted, be trustworthy. If you demand hard work, work hard. If you want your colleagues to level with you, level with them. It's not very complicated."

"Of the Fortune 500 largest corporations in 1955, only 71 remain on the list today."

"'We did it ourselves.' Really? When I hear that, I'm bold enough to ask, 'Now just how did you arrange to be born in the United States of America?"

"Wisdom. The kind of wisdom that was rife in the age of this nation's Founding Fathers--is in short supply."

"Benjamin Franklin began each day with the (written) question: 'What Good shall I do this day?' and ended with 'What Good have I done today'".

"Success, in short, can be measured not in what we attain for ourselves, but in what we contribute to our society."

"I was born and raised to save rather than spend. I can't remember a single year during my long career in which I've spent more than I earned."

"I've been able to accumulate wealth despite giving, for about the past 20 years, one-half of my annual income to various philanthropic causes."

"So, in comparison to nearly all, if not all, of my peers in this business, I'm something of a financial failure."

"I do my best to avoid the temptation to peek at the value of my fund holding--a good rule for all of us."

"When John D Rockefeller was asked how much was enough, he answered:, 'just a little bit more.'"

"I hope many moons from now, I will take time to revel in the memories of all the wonderful battles I've fought during my long life."

"If you carry nothing else away from your reading of this book, remember this: The great game of life is not about money; it is about doing your best to join the battle to build anew ourselves, our communities, our nation, and our world."
Thank you, Jack!

Best wishes.
Taylor
"Simplicity is the master key to financial success." -- Jack Bogle

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Re: Couple of questions about passages from Bogle's book "Enough"

Post by JoMoney » Sat May 26, 2018 5:39 pm

http://johncbogle.com/wordpress/wp-cont ... I_4-07.pdf
... Echoing the title of my remarks this evening—“Stewardship vs. Salesmanship—Bond
Mutual Funds Gone Awry”—this dichotomy reflects the triumph of salesmanship over
stewardship in the management of bond funds; it reflects building a fund’s assets by supply-push
seller incentives rather than demand-pull buyer incentives; and it reflects, perhaps above all, the
information asymmetry (a nice economist’s term!) that exists when the seller knows a lot about
these “relentless rules of humble arithmetic” (a favorite phrase of mine, courtesy of Justice
Brandeis) that I’ve earlier described, rules of which the buyer is largely ignorant. It is this
unfortunate combination that allows bond funds with substantial sales charges and high expense
ratios to dominate a business segment in which investor returns, slashed by those very costs, are
doomed to be inadequate.
http://johncbogle.com/wordpress/wp-cont ... nra-07.pdf
... aiding and abetting illicit market timing schemes. Or the number of leading brokerage firms engaged in “breakpoint” frauds in which excessive sales loads were imposed on investors. Or having one of the bluest of the industry’s blue-chip firms—one of the three largest firms our field—violate NASD rules by allocating brokerage commissions as a quid pro quo to brokers that sold the shares of its funds. What’s more, according to the NASD decision, the firm’s executives were duplicitous on the witness stand. (The actual word was “disingenuous.”) While the examiner recommended a $100 million fine, it was reduced to $5 million on the grounds that the illicit practice was rife in the industry (i.e., “everyone else was doing it, so I can too.”)
Together, this disgraceful conduct represents a sorry chapter in this industry history. But I know of no easy way to regulate or legislate a return to our industry’s traditional values. Competition, in fact, is driving us in quite the opposite direction. As long as our industry participants—our fund managers and marketers, our brokerage firm account executives, and our financial advisers—have more information at hand than their clients possibly could—the economists call this information asymmetry—a largely unaware investment public will be inadequately informed. Regulations calling for more complete disclosure would be a huge help in protecting investors from their own naiveté and lack of information.
http://johncbogle.com/wordpress/wp-cont ... rtant1.pdf
... The argument that our financial system is costly because of the benefits it brings to investors belies the reality of our system, in that it does not operate under classic free market conditions. In fact, the system is a model of information asymmetry (which favors sellers over buyers), imperfect competition, and irrational choices driven by emotions rather than reason.
"To achieve satisfactory investment results is easier than most people realize; to achieve superior results is harder than it looks." - Benjamin Graham

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Re: Couple of questions about passages from Bogle's book "Enough"

Post by arcticpineapplecorp. » Sun May 27, 2018 11:37 am

thanks again everyone, especially those who added some additional insights. Very helpful and more reading for me to do.
"Invest we must." -- Jack Bogle | “The purpose of investing is not to simply optimise returns and make yourself rich. The purpose is not to die poor.” -- William Bernstein

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