The article is at:
http://www.pathfinder.com/fortune/1999/11/22/buf.html
Doug, did you send him a copy of your book? He's the only mainstream commentator I know who dares talk about the financial industry's take as essentially dead weight, instead of blabbing about "increased financial productivity".
FORTUNE 500 1998 profits: $334,335,000,000
Market value on March 15, 1999: $9,907,233,000,000
As we focus on those two numbers, we
need to be aware that the profits figure
has its quirks. Profits in 1998 included
one very unusual item--a $16 billion
bookkeeping gain that Ford reported
from its spinoff of Associates--and
profits also included, as they always do
in the 500, the earnings of a few mutual
companies, such as State Farm, that do
not have a market value. Additionally,
one major corporate expense,
stock-option compensation costs, is not
deducted from profits. On the other
hand, the profits figure has been
reduced in some cases by write-offs
that probably didn't reflect economic
reality and could just as well be added
back in. But leaving aside these
qualifications, investors were saying on
March 15 this year that they would pay
a hefty $10 trillion for the $334 billion in
profits.
Bear in mind--this is a critical fact often
ignored--that investors as a whole
cannot get anything out of their
businesses except what the businesses
earn. Sure, you and I can sell each
other stocks at higher and higher prices.
Let's say the FORTUNE 500 was just one
business and that the people in this
room each owned a piece of it. In that
case, we could sit here and sell each
other pieces at ever-ascending prices.
You personally might outsmart the next
fellow by buying low and selling high. But
no money would leave the game when
that happened: You'd simply take out
what he put in. Meanwhile, the
experience of the group wouldn't have
been affected a whit, because its fate
would still be tied to profits. The
absolute most that the owners of a
business, in aggregate, can get out of it
in the end--between now and Judgment
Day--is what that business earns over
time.
And there's still another major
qualification to be considered. If you and
I were trading pieces of our business in
this room, we could escape transactional
costs because there would be no
brokers around to take a bite out of
every trade we made. But in the real
world investors have a habit of wanting
to change chairs, or of at least getting
advice as to whether they should, and
that costs money--big money. The
expenses they bear--I call them
frictional costs--are for a wide range of
items. There's the market maker's
spread, and commissions, and sales
loads, and 12b-1 fees, and management
fees, and custodial fees, and wrap fees,
and even subscriptions to financial
publications. And don't brush these
expenses off as irrelevancies. If you
were evaluating a piece of investment
real estate, would you not deduct
management costs in figuring your
return? Yes, of course--and in exactly
the same way, stock market investors
who are figuring their returns must face
up to the frictional costs they bear.
And what do they come to? My estimate
is that investors in American stocks pay
out well over $100 billion a year--say,
$130 billion--to move around on those
chairs or to buy advice as to whether
they should! Perhaps $100 billion of that
relates to the FORTUNE 500. In other
words, investors are dissipating almost a
third of everything that the FORTUNE
500 is earning for them--that $334 billion
in 1998--by handing it over to various
types of chair-changing and
chair-advisory "helpers." And when that
handoff is completed, the investors who
own the 500 are reaping less than a
$250 billion return on their $10 trillion
investment. In my view, that's slim
pickings.