A Much-Needed Word from John Bogle and Warren Buffett on Short-Term Markets 35 comments
an article to
-
Font Size:
-
Print
- TweetThis
Wow, this is some fascinating stuff, especially to a person who has written in these pages that we have to ask ourselves what are the markets for at this point. Instead of their original purpose (raising capital, speculating on the fundamental fortunes of a business) they seem to have become nothing more than a way to find random sub-second arbitrage opportunities by a select group of computers at one firm versus another.
These are some mighty heavyweights in the investment world, so the comments might actually have some weight - John Bogle of Vanguard Funds, Warren Buffet of Berkshire Hathaway, Louis Gerstner (formerly of IBM) among others. Certainly the outpouring of resistance will come fast and furious from those who benefit from the status quo ... you can be sure tales of doom will rain down since we'll lose "liquidity". The horror.
I have a very simple solution - simply tax at a 40% rate any transaction that is shorter than the time a human eye can blink. That would not solve everything, but I think it would eliminate 75% of the current issues. Daytraders (of the human kind) would still be welcome. HAL9000 would of course suffer. The question to ask is: are sensible restrictions on things that have gone completely haywire (30-70% of trading done by computer; much of it in time frames no human could ever react to), that would hurt a tiny niche of players (who now dominate the markets) - but for the (potential) betterment for the masses, something that the majority want? And yes some liquidity would go away, but I am ok paying a bit extra so that the market actually has something to do with fundamentals again. A small price to pay in my mind.
I doubt this will get anywhere once it gets through the winding course that is Washington D.C., since financial oligarchs dominate the country's political mind share, but at least someone with a much louder voice than I is asking the very necessary questions... "adult conversation" is here. Going to Washington and trying to have a discussion about anything "long term" to people whose only focus is 1 election cycle, is an irony onto itself.
Obviously, the questions are a lot bigger than HAL9000 trading - that has become a stock market dysfunction (sorry to the HAL9000 based readers). The whole system should be rethought, from compensation packages that reward top execs "win or lose" and encourage almost all focus on near term quarterly results (beat the numbers at all cost) without almost any concern for the long-term health of companies, to the completely broken board of director system, to accounting rules that exclude option awards each quarter as "a cost" (wink wink) ... but at least this is the beginning of the beginning of a conversation.
- Investors, corporate boards and managers' focus on short-term gain has become so detrimental to the economy that unless they voluntarily change their behavior, regulators should step in, according to an Aspen Institute statement to be released Wednesday that is signed by Berkshire Hathaway Chief Executive Officer Warren Buffett, Vanguard Group founder John Bogle and former International Business Machines CEO Louis Gerstner, among others.
- "We believe that short-term objectives have eroded faith in corporations continuing to be the foundation of the American free enterprise system, which has been, in turn, the foundation of our economy," said the statement, signed by 28 high-profile managers, investors, academics and others.
- Over the past several decades, investors have become increasingly focused on the short term, trading more and more frequently. In 1990, for example, the average holding period of a stock trading on the New York Stock Exchange was 26 months; now it's less than nine months.
- At the same time, companies have become more focused on the short term as well, with managers concentrating on hitting near-term targets, such as analysts' quarterly earnings estimates, and as a result often forgoing measures that promote long-term growth, such as research and development -- or even routine maintenance.
My gosh let me sit down, seeing these words in print and backed by such people... maybe these folks have been reading Fund My Mutual Fund?
- Often, discussions about so-called short-termism have devolved into finger-pointing exercises. Managers will charge investors with being overly focused on short-term results, for example, while investors will say managers' short-term focused compensation schemes and cozy relationships with boards of directors are at fault.
- But the Aspen Institute statement argues the problem is actually systemic ...
Yes yes! It's the system, the whole architecture. Make some room for the AARP crowd outside of the Matrix, we're gaining converts.
- ....and regulators need to change incentives to encourage long-term investing.
Bogle, and Buffet - now you too can be called socialists for caring about something other than "short term profitability at any cost to a society". To which I ask, how did we ever allow libraries in this country? They don't provide profit and hence are a stain on the country - but I digress.
- "It's not just managements or boards or regulators or investors," said National Association of Corporate Directors Chair Barbara Hackman Franklin, a former Commerce Secretary under George H.W. Bush who signed the statement. "We're all in the soup together we really need to stop and say, 'Wait a minute, do we really want to keep doing this?'"
- "There's a bias in the system and as long as our system is biased toward short-term trading, we have to expect that's what we're going to get," she said.
- Sharply lower trading costs and the advent of information technology has made it far easier for investors to trade more frequently in recent decades. With the introduction of 401(k) plans, investors have become increasingly passive, leaving trading decisions to fund managers who are often compensated based on their short-term performance.
- Finally, derivative products enable activist investors to buy a company's shares while simultaneously making bets its shares will fall, allowing them to take large voting stakes while having no real economic stake in the company.
- Because investors ultimately have the power to hire and fire managers and set compensation, their focus on the short term has pushed companies to act in the short term as well.
- "Any CEO feels the pressure of meeting Wall Street expectations."
Here are the proposed solutions - are they perfect? Most likely not but it's a conversation starter.
- To encourage investors to take the long view, the statement suggests that the government could change the tax-code to reward long-term holders over short-term holders -- by, for example, setting capital gains tax rates that get gradually lower the longer an investor hangs on to a companies shares.
- Additionally(, fund managers should act in the long-term interests of the investors whose money they manage (what an outrageous concept!)-- something that, the statement argues, fiduciary duty stipulates they do.
- Finally, activist investors who take large stakes in a company should be required to disclose when they have entered into derivative contracts to hedge away risk.
Feel free to comment, even if you are a "socialist"... like Warren.
Related Articles
|
-
The Seeking Alpha 100
See allThe top 100 stock
market authors
selected for publication in the last week
Seeking Alpha 100 » -
Fastest Climbers
Those with the largestSee all
increase in followers
in the last week
Fastest Climbers » -
Top Commenters
Top commenters,See all
as ranked by their peers
Top Commenters » -
Top Instabloggers
The 100 most activeSee all
Instabloggers.
Top Instabloggers » -
Top StockTalkers
TopSee all
StockTalkers.
Top StockTalkers »
How about a graduated tax: 99% on investments held for 1/100th of a second. 88% on 1/10th of a second, 77% on 1/5th of a second etc.
Restoriing the distinction between long-term capital gains and short-term may bring some improvements, but it likely will bring through the door stuff we don't want: Raising taxes gets habit-forming, and so the tax raisers, i.e., the socialists, won't stop at curbing the obvious computer-generated mischief with the result that further damage will be done to the economy at a critical point.
Lamenting short-term corporate thinking is nothing new. This article could have been written 30 years ago (save for the HAL 9000 part and the daily call to the workers of the world), although in those days, the Japanese were the masters of the universe rather than the Chinese. Short-term thinking was going to bring down the capitalist system then but it didn't.
www.fundmasteryblog.co.../
And you can't have responsible ownership of companies, when the turnover of owners is so high. Because company executives have to please their short-term owners, who happen to be the majority of owners. And that leads to all kinds of irresponsible borrowing and risk taking in order to get short-term results.
You can't have companies thinking and planning for the long term. When their owners have short-term horizons. Short-term owners aren't interested in long-term performance. They want results now and not tomorrow.
And this is a question of not only of what's good for the stock market. It's a question of what's good for the economy. Because the stock market is supposed to serve the economy and not the other way around.
The economy can't work well when most owners of companies are short-term gamblers and not long-term investors.
> their short-term owners
How exactly they are doing that? Too bad they are doing nothing for my pleasure.
On Sep 10 11:39 AM Nick36 wrote:
> The average holding time for stocks is now 6 months.
> www.fundmasteryblog.co.../
>
>
> And you can't have responsible ownership of companies, when the turnover
> of owners is so high. Because company executives have to please
> their short-term owners, who happen to be the majority of owners.
> And that leads to all kinds of irresponsible borrowing and risk taking
> in order to get short-term results.
>
> You can't have companies thinking and planning for the long term.
> When their owners have short-term horizons. Short-term owners aren't
> interested in long-term performance. They want results now and not
> tomorrow.
>
> And this is a question of not only of what's good for the stock market.
> It's a question of what's good for the economy. Because the stock
> market is supposed to serve the economy and not the other way around.
>
>
> The economy can't work well when most owners of companies are short-term
> gamblers and not long-term investors.
And there are many examples of that. Lehman Brothers, AIG, Bear Stearns, Countrywide Financial, etc.
On Sep 10 11:43 AM Baboon wrote:
> How exactly they are doing that? Too bad they are doing nothing for my pleasure.
On Sep 10 11:49 AM Nick36 wrote:
> Executives try to please their short-term owners by gambling with
> the future of their companies. Such gambling often brings great
> profits in the short-term but ruins the company in the long-term.
>
>
> And there are many examples of that. Lehman Brothers, AIG, Bear
> Stearns, Countrywide Financial, etc.
On Sep 10 09:42 AM Tony Petroski wrote:
> Mr. Mark. I agree with 95% of that which you have written in this
> article. Why the daily dose of "We are all Socialists Now"?
>
> How about a graduated tax: 99% on investments held for 1/100th of
> a second. 88% on 1/10th of a second, 77% on 1/5th of a second etc.
>
>
> Restoriing the distinction between long-term capital gains and short-term
> may bring some improvements, but it likely will bring through the
> door stuff we don't want: Raising taxes gets habit-forming, and
> so the tax raisers, i.e., the socialists, won't stop at curbing the
> obvious computer-generated mischief with the result that further
> damage will be done to the economy at a critical point.
>
> Lamenting short-term corporate thinking is nothing new. This article
> could have been written 30 years ago (save for the HAL 9000 part
> and the daily call to the workers of the world), although in those
> days, the Japanese were the masters of the universe rather than the
> Chinese. Short-term thinking was going to bring down the capitalist
> system then but it didn't.
On Sep 10 11:39 AM Nick36 wrote:
>
>
> And this is a question of not only of what's good for the stock market.
> It's a question of what's good for the economy. Because the stock
> market is supposed to serve the economy and not the other way around.
>
>
> The economy can't work well when most owners of companies are short-term
> gamblers and not long-term investors.
People in capital markets hate to admit it, they are simply feasting on hosts. Like a gnat on an elephant it is ok when you are just 1 gnat. BUt its to the point we cannot see the elephant anymore as there are so many gnats taking their bite.
On Sep 10 11:49 AM Nick36 wrote:
> Executives try to please their short-term owners by gambling with
> the future of their companies. Such gambling often brings great
> profits in the short-term but ruins the company in the long-term.
>
>
> And there are many examples of that. Lehman Brothers, AIG, Bear
> Stearns, Countrywide Financial, etc.
In Europe socialism helps the people. In the US it helps the corporate. Its socialism in both cases.
On Sep 10 12:41 PM mkreisel wrote:
> What we are having now is socialism for the top 1%.
. Bogle, and Buffet - now you too can be called socialists for caring about something other than "short term profitability at any cost to a society".
Who thinks like that? Not the Free Market and Libertarians you always love to attack. That's a poor straw man's argument.
> In Europe socialism helps the people. In the US it helps the corporate. Its socialism in both cases
So then why do Americans enjoy a higher standard of living than Europeans? Higher incomes, more living space, more freedoms? Do you even understand why this country that was born only 233 years ago grew to be a super power? Why are the more free economic areas ( Singapore, Taiwan, New Zealand, Australian, US) more prosperous? Ohhh rationale people working together and trading goods and labor voluntarily works is a superior way to organize an economy.
Nobody is supposed to be allowed to take away inalienable rights to LIFE, LIBERTY, and PROPERTY. The government didn't give you these rights, you were born with them. Other countries take these rights away. Nobody gives you these rights... you were born with them.
Brave Patriots fought and died to fight tyranny, and now we're just letting it walk right in the front door. The pen is mightier than the sword indeed.
We are avoiding socialism in America by bailing out the rich, that is, by providing socialism for the rich. Ironic, isn't it. Let's use Goldman Sachs micro-trading profits to finance health-care for the country.
When two bands of people were to meet, they were much more likely to fight over scare resources than trade and make each other richer. Think about that for a second.
In 1776 Adam Smith said,
"It is not from the benevolence of the butcher, the brewer, or the baker, that we expect our dinner, but from their regard to their own self-interest. We address ourselves, not to their humanity but to their self-love, and never talk to them of our own neccessities but of their advantages."
In other words, the guy at Subway doesn't put together your sandwich because he likes you or because that's his favorite thing to do. The guy at Subway puts together your sub because he wants your money to live life and buy what HE wants.
Correct me if I am wrong, but we operate under voluntary trade and voluntary labor. If you don't want an ipod, you don't have to buy one. If you don't want to be a farm hand, you don't have to be. If you don't want to eat rice, you eat potatoes.
When you meet somebody you don't know, you don't kill them and take their stuff, you are much much more likely to trade with them. A few thousands years ago you couldn't say the same thing.
Similarly, maybe dividend amounts should be weighted by the number of years the stock had been owned.
I also suggest that most of the members of the board of directors be chosen by special electorates drawn by lot (in proportion to their holdings) from those long-term stockholders. (Participation would be voluntary.) Candidates for directorhood would make their pitches online, viewable only by members of this group.
Business schools should be given governmental subsidies (at first, only for their startup costs) to offer programs to teach people how to be good board members. There would be a large pool of retired executives and professors, among others, who should be recruited. Participation should be high, since many of them would wish to do part-time work that served a larger interest than that of the managerial clique. Graduates of such programs would be vouched for (or not) by their teachers and former professional colleagues, in video online endorsements (or critiques) of their candidacy.
Another candidate-pool would be exasperated mid-level managers of the firm itself, who have a good idea of what it’s doing wrong and who some of the villains are. Their fiery exposés would really rattle the hierarchy and knock off a few barnacles. The prospect of a scolding from them would encourage the others to do a better job. (If only John DeLorean had been able to make his devastating critique of GM directly to long-term stockholders and held managements' feet to the fire, instead of wasting it in the desert air in a book ("On a Clear Day You Can See GM"). The company might have been turned around in time.)
Here is a critique of the ingrained incompetence of the current crony-corporate system, which needs to be replaced:
======
"Incompetence is the self-promoting go-go business whiz who runs the company into the ground and then brassily bails out with a million-dollar “golden parachute.” Incompetence is the Peter Principle and the art of failing upward. It’s corporate facemen and hustlers nice-guy managers who avoid conflict, straight talk, and tough decisions. It’s insecure company despots who filter reality through obeisant yes-men. It’s myopic, risk-averse CEOs who starve R&D to fatten quarterly profits, and timid, passive boards of directors who rubber-stamp spectacular raises for top executives despite unspectacular, often paltry, accomplishment.
—Art Carey, "The United States of Incompetence," p. 5
You believe a lot more income is a better standard of living
Denmark is "the happiest place on Earth" according to a study I saw last year
Why? They are taxed very high
They get 6 weeks of vacation
They have time to spend with their families
Those taxes pay for healthcare and university and daycare and ... etc etc
They dont have huge houses
Many live in apartments
Many have small cars
But many are happy
In the US we have many people burnt out, who dont see their kids except after 7 pm, many are afraid to take the full 2 weeks of vacation for risk of losing job, many afraid of getting sick at the wrong time, and have a lot less job security outside of the public sector
in return they get big cars, big houses,
Define happy?
I speak to a lot of Europeans who idealize what America "is" but would profess to never wanting to trade places. I think it was very different 40 years ago.
Talk to people from Europe,... I do, a lot of them. I ask them about these things. They love some of the things you mentioned, but again I'd say 9 of 10 I speak to would not change.
It's all relative
America = We live to work
Europe = they work to live
A subtle difference
On Sep 10 01:15 PM John Galt wrote:
> I don't believe in a tax on High frequency trades because I equate
> it with insider information which is illegal. In effect your position
> on just taxing HFT is like saying insider information that is acted
> upon should be legal, just tax it at a high rate. I disagree. Computers
> using information that a human being possibly couldn't use is using
> information not available to the public.
>
> . Bogle, and Buffet - now you too can be called socialists for caring
> about something other than "short term profitability at any cost
> to a society".
>
> Who thinks like that? Not the Free Market and Libertarians you always
> love to attack. That's a poor straw man's argument.