2005: Should stock exchanges be non-profits?

AUDIENCE MEMBER: I’m Maggie Gilliam (PH) from New York City.

As someone who visited the New York Stock Exchange at a very early age and have been touting its merits over the years, could you comment a little bit about what you think of the shenanigans going on currently?

WARREN BUFFETT: Well —

CHARLIE MUNGER: Where?

WARREN BUFFETT: At the exchange.

CHARLIE MUNGER: Oh.

Warren, you’re so good at this. (Laughter)

WARREN BUFFETT: You mean at shenanigans or —

I personally think it would be better if the New York Stock Exchange remained as a neutral — and it’s not strictly a non-profit, it’ll earn some money — but as a not-for-big-profit, we’ll put it, institution.

I mean, the exchange has done a very good job over centuries. It’s one of the most important institutions in the world. And the enemy of investment performance is activity. And the creator of profit in a profit-minded exchange is activity.

So, I personally would rather not have an exchange which is trying to increase its earnings per share annually, and thereby wanting to encourage people to trade more actively and create more income for itself.

That will not be, in my view, good for the American investor. So, I think that the exchange of yesterday may be better for the American investor than what looks like it may be the exchange of the tomorrow.

Now there may be all kinds of reasons that are — people find compelling why they want to turn it into a for-profit exchange.

But I know the American investor will not be better off if volume doubles on the New York Stock Exchange.

And I know that the New York Stock Exchange as a for-profit institution would be trying to figure out ways to have that volume increase and to perhaps even charge more money one way or the other.

I mean, you know, the profit of an exchange, the profit of the people working on them, in a sense that’s the frictional cost of capitalism. That’s coming out of the earnings of the businesses.

And, you know, IBM or General Motors or General Electric will not earn more money because their stock turns over more frequently.

But a for-profit exchange will earn more money. And I do not like the idea of the exchange getting on the side that’s against the long-term interest of investors.

Charlie?

CHARLIE MUNGER: Well, I feel, on this one, the same as you do with — much more strongly.

I think we have lost our way when people like the governors of the stock exchange and the CEO fail to realize that they had a duty to the rest of us to act as exemplars, there was — of the right behaviors.

Once your activity is that freighted with public significance, I think you’ve got a duty to create the right appearances. You have a duty as an exemplar.

I mean, you do not want your first grade school teacher to be fornicating on the floor or drinking booze in the classroom or —

And similarly, you — I don’t think you want your stock exchange to be all over the headlines with wretched excess. And I certainly don’t think you want to turn the major stock exchange of the country into even more of a casino than it is already.

I think we have totally lost our way on this stuff. And I agree with Warren that it ought to be — (applause) — a public institution that cares deeply about its duties as exemplar.

WARREN BUFFETT: I wish I’d gone to first grade where he did. (Laughter)

CHARLIE MUNGER: I didn’t hear that.

WARREN BUFFETT: I said I wish I’d gone to first grade where you did.