Warren Buffett has been quoted as saying that his ideal holding period for a security is “forever”. While Buffett has exhibited long-term perseverance with some of his large cap holdings like Johnson and Johnson and Coca-Cola, he’s actually proved to be quite the trader recently with some options plays and short-term funding of the troubled finance industry, pocketing billions of dollars in profits. In spite of his opportunism, Buffett still has his eyes on the long term prize. So, when he and cohort, John Bogle, founder of Vanguard Funds and leading proponent of passive index investing, appended their names to a recent report from the Aspen Institute, investors shouldn’t be surprised.
An article in the WSJ profiled the Aspen Institute’s most recent report which you can read in its entirety here (.pdf). The WSJ’s Justin Lahart reports in “An End to the Focus on Short Term Urged” that the elite Aspen Institute’s report is pretty clear in its characterization of the short-termism that pervades both Wall Street and corporate America.
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.
Those are pretty strong words for proponents of the free market like Buffett and Co. The report details that this short-term focus has become so ingrained in our society that we may need to turn to regulation to change our mindsets and behaviors. As all investors know, the quarterly earnings cycle ticks like clockwork and we seem to repeat history over and over again every three months.
Lahart describes the symptoms of this disease of myopia:
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.
Assuming we buy the reports assertion that long term thinking and investing is better for the markets and society (I’m not necessarily convinced), how does the Aspen Institute believe that we can change? Well, for starters, the Aspen Institute believes that its suggestions will fall on open ears with an activist Obama administration clearly on the prowl for structural change.
The report focuses on three distinct avenues:
- Changing long term incentives by skewing capital gains tax further in favor of long term holdings
- Encouragement of the Obama administration’s current direction for establishing clear fiduciary duties for advisers as well as for broker/dealers
- Build greater transparency into the whole system by strengthening investor disclosures
Will it work? I don’t know but I’m skeptical. I find it hard to believe that the American system, from the government on down, can make such a sea-change of a move. Administrations, especially such a young, aggressive one like President Obama’s, flip-flop on policy and direction all the time only to be replaced every four years. Cars, computers, and even marriages have become disposable. Me-first consumerism has been perfected.
It could be that with carnage associated with the 2008 stock market, investors, and Americans, in general, are retreating back to basics. If so, longer term holdings may just be part of the game plan anyway. Some older investors burned by last year’s market are holding long-and-strong, convinced that the market will prove their holdings right of the long term.
Leading financial blogger Manual of Ideas likes the ideas floated by the Aspen Institute’s report and says they are long overdue. But he’s suspect of an overhaul of an already onerous, complex tax code.
The extremely complex United States federal tax code already differentiates between short and long term capital gains by imposing a much lower 15% rate on capital gains realized from securities held for over one year while gains on assets held for shorter periods are taxed as ordinary income at much higher rates. Adding a third tier into the mix would complicate the tax code to some extent. However, the attraction of a very low rate (maybe 5 to 10%) on “super long term” capital gains has obvious appeal for “buy and hold” investors.