The Long-Term Stock Exchange Is Worth a Shot
There is a pervasive idea that longer term investments are somehow better (morally superior, more socially responsible) than short-term. This stems from the ancient prejudice toward financiers (usually jews) and the corresponding ancient prejudice against speculation. Let me debunk it:<p>- Suppose an 18 year old and a 80 year old each buy a share of company XYZ&#x27;s stock. Whatever their goals might otherwise be, the 80 year old might quite plausibly have a different time horizon expectation for returns than the 18 year old.  If both choose to buy the same stock, they must both believe the stock is a good investment for their respective time horizon goals.  Maybe it will be, maybe it won&#x27;t be. In both cases, someone else sold each of the shares they both bought. The person who sold the shares had deemed the stock a not-so-good investment compared to other options and wished to liquidate.<p>- Now, suppose that we add a day trader to the mix, who also buys a share because she thinks that company XYZ offers a good investment based on her specific time-horizon goals.  The demand she induced on the available stock helped to support the validity of whatever the current price appears to be.  By being willing to buy, she helped create a market for the 18 year old and 70 year old to sell, should one of them change their mind about the stock.<p>- Now imagine we have 1000 day traders, 1000 18-25 year olds, and 1000 70-80 year olds participating in the market for this stock, with some buying and some selling every day.  Due to all the transactions, we have high levels of liquidity for the stock and low &quot;inventory risk&quot; associated with holding the stock in inventory as a market maker, and thus lower spreads.  Market maker spreads are a function of risk, which is correlated with supply and demand. The more supply and demand, the less risk there is to holding inventory.<p>- Now suppose we decide we don&#x27;t like anyone who wishes to invest on a less-than-10-year time horizon. We determine that they are acting to incentivize the company to focus only on short-term profits. So we pull some strings and simply kick out those investors and limit investment only to those promising a long-term view.  Now, there is less demand for shares, making them cheaper and limiting XYZ company&#x27;s ability to fundraise.  With less capital, XYZ must rein in its growth projections.<p>- What good were those projections anyway if they were based on short-term investors&#x27; dollars being available?  Wasn&#x27;t the capital invested by short-term investors likely to disappear at the first sign that short-term results might be floundering?  How can a business adequately plan for the long term if it is distracted by the need to fundraise from such a fickle lot?<p>- The answer is simple: If a company&#x27;s business activity is focused on long-term goals and long-term thinking, then it will attract like-minded investors.  Like the random walk of day to day stock price, day to day information and speculation will result in short-term transactions occurring, but those transactions benefit the firm significantly as they provide an excellent price discovery mechanism. The day-to-day price will also reflect both short-term and long-term industry-wide shifts, and this will be true both in a long-term constrained exchange and an unconstrained exchange. If the firm is doing wind farms and has a 30-50 year view, and then suddenly a company doing solar comes up with a 100x efficiency improvement, that is going to impact the long-term viability of wind tech, as it should.<p>While I agree that firms embodying short-term thinking is a problem, the market mechanism offered by the exchange is not the problem, the problem is that executives and employees are generally given predominantly short-term incentives to care about.  Imagine the following:<p>- Instead of ISOs issue employees a basket of different time-deferred options, so that each employee gets his&#x2F;her comp incentive spread over time.<p>- Instead of giving the CEO shares of stock, give the CEO both present and future shares, and leverage the future ones to the point where any bias the CEO might have had toward short-term thinking is washed out by the appeal of the longer-term incentive. Any hypothetical business results can be used to preview what the CEO would earn in each scenario. If the owners of the company want long-term results, let that be the way the CEO will make the most (time and risk-adjusted) money.<p>Just as $100 now is worth more than $100 next year to any rational person, the comp incentives for future-looking payouts would need to be more generous in order to impact behavior in a comparable way. They would also need to be invulnerable to termination, since being worried about getting terminated and losing some or all of one&#x27;s stock is a big disincentive for long-term thinking.  The employee should be incentivized to act as if the role is a great fit and he&#x2F;she will be there for the rest of his&#x2F;her career, even though we all know that is highly unlikely if not absurd.<p>I think the ideal scenario for employees including the CEO would be a daily payout of cash salary, plus a daily payout of some basket of immediately vesting, future-weighted non-salary compensation.<p>In startups, this would look bad to the accountants who had to account for the future-weighted stuff in terms of some mythical hockey stick graph, but without it there really is very little incentive to care about the future in any non-unicorn startup. Big companies manage to create longer-term focus on retaining employment and benefits, and thus end up with a lot of 9-to-5&#x27;ers but do a terrible job of preventing organizations from doing repeated short-term-oriented fire drills. Unicorn startups create strong future incentives, but those immediately disappear once the company stops being a unicorn (or the handwriting on the wall suggests it might).<p>It should also be noted that startups are almost by definition not long-term in nature. The seed investors need a buyer so there needs to be a series A, and the series A investors need a buyer so there needs to be a series B, etc.  It&#x27;s a sales process that (when it works as intended) results in an IPO where each phase of investors get a nice leveraged payout when an IPO occurs, but the whole ecosystem is meant to create that IPO payout, which is fundamentally short-term thinking.  The sales pitch at each phase boils down to &quot;wow check out this long term win available to you at a discount because the market doesn&#x27;t yet realize this is a long term win&quot;.