Investing Caffeine

Short-Termism and the Destruction of Wealth

January 13, 2010 at 12:01 am Leave a comment

Oscar Wilde, famous Irish playwright, is known for saying “People know the price of everything and the value of nothing.” In a new book titled the Value of Nothing, Raj Patel questions the efficacy of pure capitalism and builds on that idea that many of society’s major economic problems relate to the lack of focus on value. For example, the cost of a $2 greasy burger or $1 candy bar is actually much higher once you factor in the health costs associated with obesity and diabetes – not to mention indirect charges like trash management or environmental costs.

Patel focuses a decent amount on the social damage caused by the consumerism culture for cheap goods. I think this is certainly relevant when you consider our energy policies. Whether you are a “greenie” or not is almost irrelevant from a strategic or security standpoint. Since we import more than 2/3 of our oil  from abroad – much of it from countries that wish to do us harm – it seems almost like a no-brainer to have government create incentives to wean us off our addiction to oil (see Thomas Friedman article). Since pure independence will take decades to achieve, I firmly believe we must simultaneously expand our pool of domestic available fossil fuel resources without getting into holy wars over the environment. If there is a shared focus for energy independence and lower-cost, long-term solutions, then surely there can be space for some common ground.

Short-Termism in the Investment World

In the world of investing, instant gratification, short-termism and the “Cramer-ization” of America have served as fuel behind the housing and credit induced binges that have dragged down our economy. I think Jack Gray of Grantham, Mayo, Van Otterloo nailed it when he said, “Excessive short-termism results in permanent destruction of wealth, or at least permanent transfer of wealth.”  Decisions made based on the short-term concerns regarding today’s price may have longer lasting impacts, if the consequences of short-termism are not balanced with the probable outcomes discounted into future values. Short-termism merely creates useless churning and transaction costs that make Wall Street intermediaries a fortune, at the cost of investors.

Gray has a great chart from John Bogle data at Vanguard providing a historical perspective on portfolio turnover percentage basis (the inverse being the average investment holding period in years for fund managers):

As you can see from the data chart, the average holding period for equity mutual funds has gone from about 5 years (20% turnover) in the mid 1960s to significantly less than 1 year (> 100% turnover) in recent years. Advancements in technology have lowered the damaging costs of transacting, but the increased frequency, coupled with other costs (impact, spread, emotional, etc.), have been shown to be detrimental over time (Bogle).

Congress would do taxpayers a favor too if they focused on the long-term, rather than piling on debt and building deficits for future generations. If Raj Patel and Jack Gray can get our leaders and investors to strategically think about long-term value, then I know I can sleep more comfortably at night.

Listen to NPR Raj Patel Radio Interview

Wade W. Slome, CFA, CFP®

Plan. Invest. Prosper. 

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Entry filed under: Themes - Trends. Tags: COST, GMO, Grantham Mayo, Jack Gray, NPR, Oscar Wilde, price vs value, Raj Patel, Value of Nothing.