A week ago, Donald Trump decided it was a good idea to throw the weight of his Twitter account behind the push to do away with quarterly earnings reports, ostensibly in the the interest of discouraging myopia both on the part of shareholders and corporate management teams.
Simply put, that’s a bad idea. The solution to the problem of short-sightedness on the part of investors and management isn’t to reduce transparency by moving to a semi-annual reporting regime.
Rather, the solution is reconditioning investor psychology so that shareholders remember what it means to own shares. In the same vein, management teams need to be reminded that they are responsible for ensuring the long-term viability of an enterprise; if that means disappointing myopic investors next quarter in the interest of making decisions that will benefit the company over the longer haul, well then so be it.
There’s a lengthy discussion on this in “Trump’s Plan To Do Away With Quarterly Earnings Reports Is A Terrible Idea — Surely You Know That“.
So, how myopic are investors, really? You could write a book on that subject and there are all manner of ways to quantify investor myopia. But if it’s a quick visual you’re looking for, Goldman took a stab at charting a “simplified approach to measuring global equity market turnover” in a note dated Thursday.
“Recent high-profile calls to combat short-term thinking by corporates and investors have included well-known financiers arguing against quarterly earnings guidance, a proposed bill in the US Congress to increase equity retention periods and accountability to stakeholders, and a presidential tweet questioning the practice of quarterly reporting”, the bank writes, setting the stage, before adding that the “the common thread is a perceived unhealthy focus on short-term profits at the expense of long-term strategy and investment in the market.”
To produce a quick visual that documents the evolution of global equity market turnover, the bank simply divides the value of traded equity by the total value of the global market. Here’s the result:
(Goldman)
That would appear to suggest that investors are already taking a longer-term view, as the pre-crisis trend reversed dramatically after 2008. In fact, the latest reading there is at levels not seen since 1998.
Of course as Goldman goes on to note, part of that is down to the persistent suppression of volatility in the post-crisis environment and also to the rise of passive investing.
Let’s see what happens over the next couple of years when equity volatility resets to some semblance of normal. If that reset is accompanied by more frequent drawdowns, well then you might discover that the passive crowd is even more skittish than traditional active investors. There was certainly evidence of that around the February vol. quake.
I think you have a point there: Being long term in passive investment vehicles is fine as long as the market remains docile and one is not seriously challenged in one’s belief. For a conventional stock a retail investor can easily attain a reasonable amount of confidence in its long term value. Retail investors holding a fancy ETF that in turn is holding derivatives are naturally less confident about what they’re invested in. And in a case like XIV, this is absolutely logical, but it may also apply to less exotic ETFs.
I wonder if the shrinkage in traded volumes is due also to the development of the CFD market. According to Bloomberg the worldwide value of daily trading in CFD is 75bn. This makes almost 19 Trn a year.