Realist, not conformist analysis of the latest financial, business and political news

The Long-Term Stock Exchange – Waste Of Space And Effort

In one sense there’s no waste of time and or effort in any market process. We dunno what it is that people want, we’re always still exploring the space of what is possible. So, any attempt to do anything new is worthwhile at the societal level – don’t do that again is useful information after all.

On the other hand there are things that don’t seem worth much effort, among which we should include this new Long-Term Stock Exchange starting out in San Francisco. The basic problem here being that the promoters don’t grasp how the current markets work. Given that they don’t their desires for how their new one will lack a certain something.

The basic idea is:

[perfectpullquote align=”full” bordertop=”false” cite=”” link=”” color=”” class=”” size=””]That’s the intriguing idea at the core of something that began as a bit of a loony, never-gonna-happen proposal that has become a very real consideration in Silicon Valley. It’s called the Long-Term Stock Exchange, and its goal is to reshape the incentives for the next generation of public companies so that they can focus on the long term. And if — a big if — it is attractive enough to dislodge incumbents like the New York Stock Exchange, then maybe it’s going to reshape how corporations think about their objectives and our approach to capitalism itself.[/perfectpullquote]

Everyone can still do whatever they want. But everyone has to say that they’re going to be thinking about the long term. Essentially, that’s it.

And to the problems. The first of which is that all stock markets are long term. The net present value of any stock is the net discounted value of all future income flows from it. It is this which makes stock prices so volatile. When a company reports bad results it isn’t that the dividend will fall which cuts 50% off the price. It’s that this tells us something – we think – about what dividends are going to be from here to eternity. Stock prices are already long term issues.

Lord knows what Apple’s stock price is as a multiple of the dividend and I’m not going to go look it up. But, leaving aside compounding, discounting and all that then a 5% yield is telling us that the stock price reflects the next 20 years of dividends. A 2% yield the next 50 years worth. No dividend an infinite number of years – sorta. That long term enough for you?

So, what’s the problem they’re trying to solve? That isn’t solved already?

They’ll tell you things like wanting executives to be paid in slowly vesting – say a decade – stock grants. Which is practice that already exists and is spreading because it’s a good idea. And that’s the real problem with what they’re planning. All of what they want to do is entirely possible in law right now. And any company or investor that wished to do so could. Actually, Warren Buffett’s investment strategy is pretty much what they hope everyone else will do now.

OK, great. So, everyone who wants to do this already can. The hunger for a new place to be able to do this is coming from where? Further, if this stuff is better for everyone to do – not just a matter of taste or a minority desire – then why aren’t those who are doing it outcompeting everyone else?

There’s nothing wrong at all with the basic idea of long term investing, even of a stock market where such a thing happens. It’s just that it already exists on every other stock exchange in the country. So what is the point of the Long-Term Stock Exchange?

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Rhoda Klapp
Rhoda Klapp
5 years ago

As you know I’m not an economist, but is there not a saying that goes ‘In the long run we’re all…’

Andrew Carey
Andrew Carey
5 years ago
Reply to  Rhoda Klapp

I get your thinking, but there could be a more accurate way to describe the future given that in round numbers two/thirds of the future’s grandchildren will come from one/third of us. And if you’re in that third, you don’t see the future that way. Just needs a catchy slogan to describe the feeling that you’ll still be around when life jumps across planets.

5 years ago

Surely the majority of stocks are owned by long term investors such as pension funds? Where is the short-termism we hear so much about?

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