Bogle on Reality and Illusion in Investing

John C Bogle, in his speech at The Money Show in Las Vegas, Nevada on May 15, 2006 states that the arithmetic of investing is simple because the long-term economics of investing can be forecast with remarkably high odds of success. This is because, in the long run, it is investment returns – the earnings and dividends generated by American business — that are almost entirely responsible for the returns delivered in our stock market.

He then quotes Benjamin Graham, the legendary investor and author of The Intelligent Investor:

“in the short run the stock market is a voting machine . . . (but) in the long run it is a weighing machine.”

He explains that Graham was saying is that while illusion (the momentary prices we pay for stocks) often loses touch with reality (intrinsic corporate values), in the long run reality rules.
As investors then, we must not harbor the idea that the past is prologue to the future. It is only when we can distinguish the reasons why the past was what it was, that we can establish reasonable expectations about the future.

• Text of speech
• Accompanying slides