6 Things I Learned From the Book "Clash of the Cultures"

By Markets Fool.com

I read Clash of the Cultures: Investment vs. Speculation by Vanguard founder John Bogle.

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It's a wonderful book outlining what true investing is, and what's wrong with the investment profession. Here are six things I learned.

1. Almost everything going on in markets is not investing:

In recent years, annual trading in stocks -- necessarily creating, by reason of the transaction costs involved, negative value for traders -- averaged some $33 trillion. But capital formation -- that is, directing fresh investment capital to its highest and best uses, such as new businesses, new technology, medical breakthroughs, and modern plant and equipment for existing business -- averaged some $250 billion. Put another way, speculation represented about 99.2 percent of the activities of our equity market system, with capital formation accounting for 0.8 percent.

2. Investing is more about psychology than math:

Intelligent investors try to separate their emotions of hope, fear, and greed from their trust in reason, and then expect that wisdom will prevail over the long term. Hope, fear, and greed go along with the volatile market of short-term expectations, while trust in reason goes with the real market of long-term intrinsic value. In this sense, long-term investors must be philosophers rather than technicians.

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3. Institutions are taking over from individuals:

In 1950, individual investors held 92 percent of U.S. stocks and institutional investors held 8 percent. The roles have flipped, with institutions, now holding 70 percent, predominating, and individuals, now holding 30 percent, playing a secondary role. Simply put, these institutional agents now collectively hold firm voting control over Corporate America.

4. Most of what you see is noise:

Keynes was deeply concerned about the societal implications of the growing role of short-term speculation on stock prices. "A conventional valuation [of stocks] which is established [by] the mass psychology of a large number of ignorant individuals," he wrote in 1936, "is liable to change violently as the result of a sudden fluctuation of opinion due to factors which do not really matter much to the prospective yield [...] resulting in unreasoning waves of optimistic and pessimistic sentiment."

5. People try to forecast noise:

Prophetically, Lord Keynes predicted that this trend would intensify, as even "expert professionals, possessing judgment and knowledge beyond that of the average private investor, would become concerned, not with making superior long-term forecasts of the probable yield on an investment over its entire life, but with forecasting changes in the conventional valuation a short time ahead of the general public." As a result, Keynes warned, the stock market would become "a battle of wits to anticipate the basis of conventional valuation a few months hence, rather than the prospective yield of an investment over a long term of years."

6. This goes beyond markets. A lot of what happens in the economy isn't creating real value:

There is a difference -- a difference in kind -- between what economists describe as "value-creating" activities that add value to society and "rent-seeking" activities that subtract value from society on balance. One provides new and improved products and services, delivered through ever more efficient channels and at prices that are more competitive, and the other simply shifts economic claims from one set of participants to another.

Go buy the book here. It's great.

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The article 6 Things I Learned From the Book "Clash of the Cultures" originally appeared on Fool.com.

Contact Morgan Housel at mhousel@fool.com. The Motley Fool has a disclosure policy.