Thursday, September 17, 2009

"Short-Termism" In The Market

I have blogged constantly about the value and importance of long term investing, and a recent report from the Aspen Institute came out with some practical proposals to fight what they call "short-termism" in the market.

Let's start with the problem as outlined by the institute:

"High rates of portfolio turnover harm ultimate investors’ returns, since the costs associated with frequent trading can significantly erode gains."

"Fund managers with a primary focus on short-term trading gains have little reason to care about long-term corporate performance or externalities, and so are unlikely to exercise a positive role in promoting corporate policies, including appropriate proxy voting and corporate governance policies, that are beneficial and sustainable in the long-term."

"The focus of some short-term investors on quarterly earnings and other short-term metrics can harm the interests of shareholders seeking long-term growth and sustainable earnings, if managers and boards pursue strategies simply to satisfy those short-term investors."

The report recommends market incentives to discourage such short term behavior. This would include revising the capital gains structure to impose a lower tax on stocks held for a longer time period, and an excise tax on short term trading.

These sound like sensible suggestions and should be taken seriously by the powers that be.

The full report is here.


Anonymous said...

Yes, this report makes sense. You can't have responsible ownership and management of companies, when the owners are day-traders and don't care much about the companies they own.

But the problem is that big investment banks like Goldman Sachs and others are the biggest day-traders. They use the so called High Frequency Computer Trading programs that often buy and sell shares hundreds of times every minute. Such high frequency trading now makes up more than 50% of the trading volume in US stock exchanges.

And these investment banks have very influential lobby groups on their side. Many US politicians have accepted a lot of financial contributions from big investment banks for their election campaigns. And these politicians will probably resist any reform of the current stock market trading and investing.

Eric J. Fox said...

I agree that it would be difficult politically to get such a thing passed.

Don-n-ABQ said...

On March 2, 2009, I blogged: "Thinking Long Term: Part I > Taxes on Dividends and Capital Gains" on the topic of, "how to reward long-term investors and discourage short-term traders."

So, I agree.

But, like Anonymous said, GS means trades, and trades mean commissions for the NYSE and NASDAQ. And these three entities plus hedge funds and the like mean major campaign contributions and major connections to the District of Columbia. You have to look no further that Hank Paulson.

So, while I would like to see something like this, I don't have the lung capacity to hold my breath.

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Joe Shareholder said...

Short Termism. Don't our politicians suffer from this also? Ben weakening the US Dollar with monetary policy, Congress weakening with fiscal policy. Excellent article.