In a
recentcommentary, I examined whether increasing pressure from more rapid stocktrading is inducing corporate managers to obsess more over quarterly results, impairingtheir capacity to run their firms for the long term. But I noted how pressuresfrom governments and rapid technological change are potentially just aspowerful as those from stock-market trading. How carefully can one plan for thelong term in, say, the eurozone, if the currency itself is at risk? And howlong should brick-and-mortar retailers’ timehorizons be if distribution is moving online?
It is regularly argued (to the point of having becomeconventional wisdom) that cheap and easy portfolio reconfiguration, technicaltrading strategies, and investors’ moves from one sector to another forcemanagers to pay too much attention to immediate financial results. And, astrading accelerates, the pressures increase. But, even if managers and boardsat publicly traded firms focus excessively on their quarterly results, and evenif median stock-holding periods have shortened greatly in recent decades, it isdifficult to know whether stock-market trading has become more rapid in waysthat would make managers pay even more attention to quarterly results.
We must draw some very basic – but insufficientlyrecognized – distinctions about averages. One way to measure the averagestock-holding period and its change over the past quarter-century is to add upall holding periods of all investors at the end of the year and divide thetotal by a weighted average of the stockholders. The result – the mean – is theaverage holding period.
Alternatively, we might line upall of the holders from shortest to longest and check how the holding periodfor the one in the middle has changed – the median.Often, these two ways to measure an average will have the same result and showthe same rate of change. But when they differ, the difference should affect ourthinking about the phenomenon. For stock markets, the difference may beimportant.
Consider something not involving stock trading. Imagine asuburb of Seattle with a population of 10,000 and an average annual
per capita income of$50,000 in 1970. By 1980, the average soars to $100,000. What was the source ofthis spectacular increase? Was it superior education, good policing,infrastructure development, or something else? Can policymakers elsewhere studywhat the suburb was doing right and imitate it?
Now consider that mean wealth doubled in Redmond,Washington, as a result of Bill Gates’ success. By 1980, his meager 1970 incomeof $50,000 had increased to, say, $50 million. Is it meaningful to say thataverage income in Redmond had doubled in the decade, when income was unchangedfor everyone else? The median, unchanged over the decade, would better describethe suburb’s average income. Whether Redmond’s average wealth increased dependson how you look at it.
For stock markets, consider this possibility: 100shareholders each hold 100 shares of the XYZ Corporation for three years. Theysell their shares after holding them for three years to other investors, who inturn hold their shares for three years and then re-sell them. The averageholding duration for each shareholder is three years.
Thereafter, 90 do what they have always done – hold forthree years. But the other 10 sell their shares every four months to a new setof shareholders. One might be tempted to say that the average duration forholding stock in the XYZ Corporation was only 20 months, while in the good olddays it was 36 months. In other words, holding duration was nearly halved. And,if we think managers are paying more attention than ever to quarterly results,we might think we have found the culprit.
But what is the best way to interpret the change in theholding duration for policymaking purposes? For 90% of the shareholders,nothing has changed and their holding period has not shortened.
This analytic problem is hardly unique to short-termism. When a distribution is skewedand not symmetrical around a middle value, the mean can fail to describeproperly the population and its change over time. Emerging evidencesuggests that this may well be the case in the stock market.
A team of finance economists – Martijn Cremers, AnkurPareek, and Zacharias Sautner –
recently assembled data examining a related issue. Theyfind that holding durations for two of America’s primary shareholders, Fidelityand Vanguard, have not budgedsince 1985. More broadly, the duration of holdings by mutual funds and pensionfunds – America’s core stockholder class –
increased during the quarter-century from1985 to 2010. In 1985, the duration for stock holding in the United States was1.2 years; by 2010, it had increased to 1.5 years. A fringe of rapid traders may well havegreatly reduced the meanduration of stock holding, but, for the bulk of traditional Americanshareholders, the duration did not change.
These results fit badly with the typical argument thatshort-termism has increased in recent decades. Maybe the stockholder base wastoo short-term-oriented a quarter-century ago – maybe the original 1.2 year(mean) average holding period was too short. But, if American management hasbecome more short-termist in the ensuingquarter-century and even more attentive to quarterly financial results, the reason does notseem to be a shortening of core shareholders’ holding period. The media, corporateplayers, and lawmakers seem not to be thinking about the problem – and how tomeasure it – properly.
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