John Bogle on Investing: The First 50 Years

ChapterV

AS A STABILIZING FACTOR ON THE SECURITIES EXCHANGES

AS THE INVESTMENT companies have an increasingly great value of portfolio securities, their influence on the securities markets is bound to increase. Although at this time, their influence is minimal, if their growth of expansion continues at the present rate, they will of necessity exert some influence in the future. It is the contention of this chapter that the potential effect will be a beneficent one that will contribute not to greater fluctuation, but rather to stabilization.

The economic danger of a widely fluctuating securities market is in the implications it has for investment. Since prospective yields on investment are uncertain, the more uncertain is the market the greater will be the danger of uneconomic investment, and the greater the chance of loss to the investor, who is said to increase investment as the rate of interest rises. The very instability of the market, in fact, is likely to be a deterrent to equity investment.

The primary reasons for fluctuation in the market, according to Lord Keynes, are four:¹

1. The increase in equity owned by persons who have no special knowledge of their particular investment has decreased their accurate valuation of such investment.
2. Short-term fluctuation in business activity has an excessive influence on the market with respect to its actual importance.
3. The conventional valuation of stocks is based on the mass psychology of a large number of ignorant individuals, so factors ...