So Warren Buffett and John Bogle are call for increased regulations and costs on short-term speculators, and a regulatory regime that favours long-term, more passive investors. They want the deck stacked more in their favour. Fine.
But one of the big critiques against short-termers is that they distort the market. We’re told that the proper role of the market is to fund businesses, and that long-term investing is the “true purpose” of the stock market. Speculators are needed for liquidity, etc., but they’re regarded as unfortunate byproducts of a healthy market. We don’t want to let them run amok, otherwise we’ll see all kinds of distortions, and gaps between proper valuation and what stocks are actually trading at.
Fine, but then there should be some evidence of this, right? On what basis do Buffett and Bogle believe that, on net, stocks arepriced worse than they used to be?
For Buffett, at least, you’d think he’d be in favour of an environment where stocks were mispriced, since that would provide the best setup for him to take big swings at fastballs down the middle. But if anything, his stock picking prowess has lost lustre over the years.
As Megan McArdle recently pointed out, you just don’t see the same kind of Graham & Dodd, gigantic margin-of-safety stocks like you used to. Those days seem gone, in part because so many folks out there are trading aggressively poring over every little tid-bit of data.
As she wrote in The Atlantic:
Much of what Graham and Dodd did so well was simply hard coolie labour. In an era before spreadsheets or financial databases, they looked at company reports and painstakingly did the arithmetic to see where a company stood. That effort offers no competitive advantage in today’s information-saturated market. So while value investors still hew to the core notion of determining a company’s intrinsic value, waiting for the market to misprice the stock, and then buying on the cheap, nowadays that determination has much more of a subjective skill element.
Buffett is the one who has, more than anyone else, refined and redefined value investing for a new era. He is the one who stopped hunting for superbargains and started buying exceptional companies, even if they weren’t available at fire-sale prices. But what makes a company “exceptional” is idiosyncratic. Warren Buffett is exceptionally good at asking the right questions; the speech he gave in 1999 explaining why he wasn’t investing in the tech boom is astonishing for its foresight. But teaching someone to ask the right questions is much easier said than done.
When Buffett lectures on his craft, his precepts often sound less like investing rules than like the distilled essence of bourgeois virtue. Don’t speculate. Don’t risk money you can’t afford to lose. Don’t try to ride market trends. Don’t try to get rich quick. Don’t panic when the price drops. If there are no good buys, don’t buy anything. Above all, ignore what other people are saying. If everyone jumped off a bridge, would you jump too?
What do you think? Is there evidence that short-term stock traders have caused stocks to be divorced from their fundamentals — at least, moreso than they used to be?
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