Aspen Institute Makes Sensible Proposals to Combat 'Short-Termisim'

by: Eric Fox

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.

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