A wealthy family, grown over the generations to include thousands of brothers, sisters, aunts, uncles, and cousins, owned 100% of every stock in the country. Each year, they reaped the rewards of investing: all the earnings growth that those thousands of corporations generated and all the dividends that they distributed. Each family member grew wealthier at the same pace, (36)_____. Their investment had compounded over the decades, creating enormous wealth, because the family was playing a winner's game.
But after a while, a few fast-talking consultants arrive on the scene, and they persuade some “smart” cousins (37). These consultants convince the cousins to sell some of their shares in the companies to other family members and (38). The consultants handle the transactions, and as brokers, they receive commissions for their services. The ownership is thus rearranged among the family members.
(39)_____. Why? Because some of the return is now consumed by the consultants, and the family's share of the generous pie that the industry of that country bakes each year – all those dividends paid, all those earnings reinvested in the business – 100% at the outset, starts to decline, simply because some of the return is now consumed by the consultants.
To make matters worse, while the family had always paid taxes on their dividends, some of the members are now also paying taxes on the capital gains they realise from their stock-swapping back and forth, (40)_____.
(Adapted from The Little Book of Common Sense Investing)