John Bogle Comments on the Knight Debacle and Future Stock Returns

By on August 6, 2012

John Bogle, founder and retired CEO of The Vanguard Group, was a guest on CNBC today. Bogle commented on the Knight Capital trading scandal and discussed what investors can expect out of stocks in the future.

Bogle mentioned his new book The Clash of the Cultures: Investment vs. Speculation which discusses how active trading and speculation has crowded out long-term investing and resulted in negative consequences for our markets and society.

Bogle described what has been created in the markets as a “Frankenstein monster,” or frequent trading that doesn’t exist for any worthwhile reason. He later added that “long-term investors should look at this with one great big yawn.”

Bogle suggested a solution to prevent future problems involving a modest transaction tax on trading (see video below).

Other highlights from the interview included Bogle’s expectations for stock returns. He believes the market is properly valued given everything we know. Based on corporations paying a two percent dividend and achieving five percent earnings growth, Bogle expects stocks to return seven percent per year on average over the coming decade before inflation. This compares very favorably to bonds 2.5% to 3% returns, Bogle added.

Responding to the claim by Bill Gross that the cult of equities was dead, Bogle indicated that Gross is mistaken and stocks will continue to provide competitive returns.

In a recent New York Times article by Jeff Sommer, Bogle expresses his concerns about the current climate (an excerpt):

“It’s urgent that people wake up,” he says. Why? This is the worst time for investors that he has ever seen — and after more than 60 years in the business, that’s saying a lot.

Start with the economy, the ultimate source of long-term stock market returns. “The economy has clouds hovering over it,” Mr. Bogle says. “And the financial system has been damaged. The risk of a black-swan event — of something unlikely but apocalyptic — is small, but it’s real.”

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