Long read: How to Tame the Casino Society

In recent years, a few people in India have begun worshipping a new god: the stock market. In 1986, one of the few contemporary investors who truly understands the nature of the stock market wrote a piece explaining why the stock market almost always turns out to be a false god. Mr. Buffett begins by quoting John Maynard Keynes:

“…the position is serious when enterprise becomes the bubble on a whirlpool of speculation. When the capital development of a country becomes a by-product of the activities of a casino, the job is likely to be ill done.”

One of the reasons many of us in Marcellus are shareholders of Berkshire Hathaway via Marcellus’ Global Compounders Portfolio is because of the Chairman’s ability to spot massive social shifts before anyone else can. Mr Buffett writes all the way back in 1986:

“It is not lost on the best and brightest of our youth that the big fast money of the 1980s is to be made by creating deals rather than by creating products. If a graduating MBA were to ask me, “How do I get rich in a hurry?”, I would not respond with some quotations from Ben Franklin or Horatio Alger, but would instead hold my nose with one hand and point with the other toward Wall Street. Per point of IQ and per erg of work, the near-term payoff in Wall Street will vastly exceed that at General Motors, General Electric or Sears. This point is well understood today on university campuses: Wall Street has become Mecca for a far disproportionate number of the bright and ambitious.

Wall Street, unsatisfied by astronomical volume in garden-variety stocks and bonds, has invented new and enticing products for the casino. First came options. These were followed by futures contracts on real financial instruments, such as Treasury bonds. In turn came futures contracts on nonreal items such as market indices. Finally, in the search for an even more exciting and volatile game, Wall Street created options on future index numbers.

Predictably, these options are a great favorite…Brokers, understandably, love such client hyperactivity: the Street’s income depends on how often prescriptions are changed, not upon the efficacy of the medicine. But what’s good for the croupier, taking his bite out of each transaction, is poison for the patron. Turning from investor into speculator, he suffers the same kind of negative financial effects that befall the person who is converted from making a once-a-year bet on the Kentucky Derby to betting all races, every day.”

Warren Buffett then goes on to provide a policy intervention which can mitigate some of the more destructive effects of excessive trading & speculation:

“What can be done, now that the whirlpool of speculation has engulfed enterprise? A proposition that may initially sound outlandish could have substantial merit: let the government impose a 100 percent tax on any profits derived from the sale of stocks or derivative instruments that the holder has owned for less than a year. And apply the tax to everyone, including pension funds and other entities that normally are not taxed. It’s one of Wall Street’s many ironies that such funds, which should have the longest investment perspective, have been transformed by the competitive race on Wall Street into some of the most speculative players around.

The 100 percent tax would not confiscate capital when instant liquidity was required. You could get your moneyback if you sold at a price above your cost 10 minutes or 10 months after purchase. But there could be no profit to you from your capital-allocation decisions unless they had a time horizon of a least one year.

Much longer-term horizons than a year have traditionally prevailed in real estate, a fact that has not produced a shortage of office buildings or shopping centers. Similarly, longer horizons for stock purchases will not produce a shortage of cars or TV sets.

One result of a 100 percent tax would be certain: the substantial brain power and energy now applied to the making of investment decisions that will produce the greatest rewards in a few minutes, days or weeks would be instantly reoriented to decisions promising the greatest long-term rewards.”

With the India in the middle of the deepest earnings slowdown seen this century (leaving aside global exigencies like Covid and the Lehman bust), hopefully the Exchequer is reading this blast from the past from Mr. Buffett.