I found this a worthy read...relevant 35 years ago...as well as today:
Warren E. Buffett, FORTUNE May 1977
"It is no longer a secret that stocks, like bonds, do poorly in an inflationary environment. We have been in such an environment for most of the past decade, and it has indeed been a time of troubles for stocks. But the reasons for the stock market's problems in this period are still imperfectly understood."
inflation-equity-investor-by-warren-buffett
Comments
Congratulations and thank you for your unexpected discovery of Warren Buffett’s 1977 Fortune magazine article. Congratulations for such a marvelous find. Thank you for providing access to MFO participants.
This overarching market analysis article is both clear and concise, although a bit difficult to navigate at times because of the complexity of its global scale concepts. Buffett integrated many diverse, interactive entities into his universal perspective. It is pure Warren Buffett in scope; it is pure gold for investors. It does require a careful read, and perhaps several rereads.
In the second section of the article, Buffett said:
“In the real world, of course, investors in stocks don't just buy and hold. Instead, many try to outwit their fellow investors in order to maximize their own proportions of corporate earnings. This thrashing about, obviously fruitless in aggregate, has no impact on the equity, coupon but reduces the investor's portion of it, because he incurs substantial frictional costs, such as advisory fees and brokerage charges. Throw in an active options market, which adds nothing to, the productivity of American enterprise but requires a cast of thousands to man the casino, and frictional costs rise further.”
It’s somewhat amusing that this paragraph could have been written by John Bogle instead of Buffett. In fact, Bogle has composed very similar versions of it many times in the past.
Given the fact that in today’s marketplace 70 % of the trading is now done by institutional experts, the nonproductive, wasteful “trashing about” is presently accomplished by the so-called market professionals. Unfortunately, for us many mutual fund owners, the cost of those unnecessary transactions directly subtract from our bottom-line payoffs.
Once again, thank you so much for your diligent and rewarding research that uncovered this gem.
Best Wishes.
Thank you for your question. It allows me to expand on the statistic.
The salient point that I was attempting to highlight with the quoted 70 % number was that in a simplistic model of only two fundamental cohorts, individual retail investors and institutional investors, the professional money managers are basically trading with each other.
That surely was not the case in the 1970s when Buffett wrote his extraordinary article. In that period, we individual investors were a dominant segment of the market trading volume. That’s not the case today.
In the 1970s smart money (the pros) was competing against dumb money (retail investors). It was definitely not a level playing field. It was equivalent to the New York Yankees going against a sandlot squad.
Today, it’s smart money competing against smart money with no discernable edge for anyone. As Michael Mauboussin would likely conclude, the smart money population tends to neutralize its perceived advantages and luck becomes a more major contributor to final performance.
It is not relevant if the final trade execution is made by a professional man or a machine that was programmed by a man using similar decision rules and strategies. The trade is still institutional in design; computers are merely surrogates for the institutions.
In fact, the institutional houses have been committing more and more of their trades to a computer. The computer is faster in sorting the decision matrix options, it does not make errors, and it is not hampered by emotions. It never panics, but it is still susceptible to uncertain Black Swan events.
Like it or not, we individual investors are of diminishing significance in an ever faster marketplace. I would be surprised and disappointed if some of my mutual fund managers did not extensively employ computer programs to analyze candidate investments and then immediately execute attractive opportunities. I can not do that task effectively.
I was purposely conservative when citing the 70 % institutional equity daily trading volume statistic. That’s an older number that recent updates suggest is much higher. A few studies place the NYSE institutional trading volume in the mid-90 percent range.
Best Wishes.