Put the hold back into shareholding

By Lisa Buckingham for the Daily Mail
Updated: 08:57 EST, 5 September 2010

 

Short-termism has always been a term of abuse in the world of business.

Shareholders used to lambast management for short-term decision making. Companies under threat of takeover criticised investors for taking a short-term view.

This week's meeting of finance Ministers is likely to see another push from France and Germany for the introduction of some kind of tax on financial transactions – an idea backed last year by Financial Services Authority chairman Lord Turner, who supported the idea of a 'Tobin Tax' to dampen the huge amount of activity in the financial sector he dubbed 'socially useless'.

Now Andrew Haldane, the Bank of England's executive director for financial stability, has weighed into the debate, suggesting there should be some kind of disincentive to the non-stop money-go-round that lines the pockets of so many in the City, but achieves little for the rest of us.

In a paper entitled Patience and Finance, Haldane argues that while innovations such as hedge funds, derivatives and alternative investments may have improved liquidity, they have damaged returns, misaligned values and created unpleasant volatility.

His research shows that $1 invested with a long-term investment firm in 1967 would now be worth $2,650. In contrast, an activist trader's buy-and-sell behaviour would have limited that to just $75.

Despite this, we can't go back to the good old days. Accounting rules that are supposed to help the understanding of balance sheets have encouraged unnecessary movement of funds. Pension fund managers, who should surely be the real long-termists, now judge their performance on a quarterly basis.

The rise of index-linked tracker funds often leads to meaningless churn simply because a company has moved in and out of an index, rather than because of any inherent change in its value.

The average time for holding a share is down to something like seven and a half months.

The 'punishment' of a Tobin-style tax on transactions may, as with so many of the clampdowns attempted since the financial crisis, act like squeezing a balloon – resulting in an explosion of even more socially unpleasant activity elsewhere.

Far better for there to be incen¬tives for those who buy and hold, rather than dip in and out, showering commissions, taxes and bonuses as they go.

As Haldane points out in his paper, real investors could do a lot worse than look to legendary investor Warren Buffett. When asked when was the right time to sell a share, Buffett replied:'Ideally, never.'

An extraordinary loss of economic confidence has seen the markets swing in a matter of days from fatalistic belief in a double-dip recession to elation in the conviction that consumers and industry are pulling through.

Those executives willing to predict continued growth are regarded with scepticism. Yet there are some positive signs. Figures last week showed that consumer confidence bounced back strongly in August – the first upturn since February.

Clearly, one month is only one month – and while consumers think the economy will improve (an encouraging endorsement of the need for austerity as Chancellor George Osborne finalises his autumn spending review) they do not necessarily feel brave enough to think that their own financial position will necessarily get better in the coming year.

The week before we had upwardly revised second-quarter growth figures of 1.2%, while manufacturing output is returning to pre-crisis levels. And after pocketing prof¬its from the relatively low level of sterling, our exporters are putting this into lower prices, which translated into a more than 15% growth in export vol¬umes in the second quarter.

There were also highly encouraging job creation figures for July. But here's the rub. Unemployment remains at 7.8% and everyone knows that a central tenet of Osborne's spending cuts will mean big job losses in the public sector.

One of the reasons unemployment is still, relatively, low is because the private sector held on to jobs during the downturn by reducing hours and pay rather than laying people off. This means there is a lot of slack still to be taken up before those being ejected by their State employer can find redeployment with private employers.

This could bring the economy to a juddering halt. Osborne clearly must have a Plan B just in case.

And there remain huge clouds over the US housing market with its potential to derail even a strong recovery. However, indicators contain a measure of hope – at least until the New Year. We should guard against the pessimism that could bring about a self-induced double-dip recession.