Anyone running a chemical company knows that the benefits of certain key decisions can take years to develop. Many companies had to support their nascent pharma businesses for 20 years, before steady profits began to flow. Whilst major complexes can easily take 10 years from inception to completion.
Yet in recent years, investors have become more and more impatient for quick results. We can see this in the above chart, from Andrew Haldane of the Bank of England, which shows that US investors’ average holding time has reduced since the mid-1970’s from 7 years to less than 7 months. Equally, the Financial Times has recently noted that:
“Today’s markets are dominated not by long-term investors, but by speculators so busy with “burn and churn” buying and selling, that they have lost interest in what is surely the fundamental reason for owning shares: the fact that they either produce, or are expected to produce, an income.”
The FT adds that “dividends have accounted for 90% of total return in the US market since 1871“, and suggests that investors seeking to fund pension promises would do well to focus on companies whose future earnings will support steady dividend growth.
Haldane, in a very thoughtful and well-researched paper, goes on to question whether the West’s financial system has been on the right track in recent years. He worries about its “tendency towards impatience and a demand for immediate gratification“, and warns that “just as patience can ward off great disaster, impatience can ruin a whole life.“
Coincidentally, this message is also supported by the Bank for International Settlements (BIS), the central bankers’ bank, in its latest Quarterly Review. Its study of 20 recent financial crises leads it to conclude with the simple truth that “what goes up, tends to come down“.
It goes on to argue that today’s short-termist policies will only prolong the pain of the current Crisis, as was seen in Japan in the 1990’s. Instead, it says the prime need is to “fix the banking system” via “the early full recognition of losses and the restructuring of bank balance sheets“.
With shareholders seemingly ever-more short-term in their outlook, the blog will not be holding its breath for this to take place any time soon.