[grandalf]

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:

- Suppose an 18 year old and a 80 year old each buy a share of company XYZ'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'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.

- 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.

- 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 "inventory risk" 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.

- Now suppose we decide we don'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's ability to fundraise. With less capital, XYZ must rein in its growth projections.

- What good were those projections anyway if they were based on short-term investors' dollars being available? Wasn'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?

- The answer is simple: If a company'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.

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:

- Instead of ISOs issue employees a basket of different time-deferred options, so that each employee gets his/her comp incentive spread over time.

- 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.

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'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/she will be there for the rest of his/her career, even though we all know that is highly unlikely if not absurd.

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.

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'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).

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'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 "wow check out this long term win available to you at a discount because the market doesn't yet realize this is a long term win".

[notahacker]

Isn't the particular problem this is aiming to solve less that the founder CEOs aren't able to think in 30 year time horizons but more that sometimes they are[1], but fear that when most market participants have much higher discount rates, their position is vulnerable to activist takeovers (if the market's preferred yields are sufficiently short term, they'll get a value boost for kicking out the execs who's hockey stick growth is forecast for ten years' time in favour of those promising earlier revenue growth). It's not the market makers they're worried about, it's the people that actually hold stock for long enough to vote, hence the desire to weight the voters in favour of themselves and the investors that bought into their vision, and not the people buying with the intention of flipping after good quarterly figures.

I mean, they're certainly not going to raise bigger IPOs on a brand new marginal exchange with no track record and a lack of liquidity, but I'm not sure that's the real aim here. (You might need a new exchange to introduce rules like making key executives immune to termination too)

That said, I'm not sure how real a problem it is: AMZN has a very long term strategy and unusual approach towards margins and its stock is doing just fine. And cynics might suggest that other tech stocks returning unimpressive quarterly figures might actually not have thirty year plans...

[1]or want to be considered that way to justify still not turning any profits as their growth metrics start to plateau

[valuearb]

Since the 1980s activist shareholders have been heavily restricted, it’s a big cause of the explosion in CEO compensation.

We need more activist shareholders, not a plan to kill off the few remaining.

[sah2ed]

I think your example scenario would have benefited from some qualification as you paint the sentiment around the decision to put a stock up for sale in a somewhat negative light when in fact there can be several factors at play.

> The person who sold the shares had deemed the stock a not-so-good investment compared to other options and wished to liquidate.

That's one possible explanation for the decision to sell. The person could also be motivated to sell (a portion) because the current price would lead to a modest return on the initial investment; or perhaps the person suddenly needs cash and decided that a stock (from among several positions) would yield a certain amount of liquidity, ROI considerations will generally not factor into distress sale decisions.

[grandalf]

> you paint the sentiment around the decision to put a stock up for sale in a somewhat negative light

Only to the extent that all stocks, bonds, and investments (in a sense) compete against each other. Thus, selling means that the owner decided that one of the competitors was a better fit. Of course, as you point out, it could just be due to some unrelated cash flow issue.

[cujic9]

For a proper debunking, you need to address the fact that it's usually pretty easy to wring cash out of a business, but you can only do it once.

That's why longer term investments are preferable. It puts the focus on building sustainable value for its owners rather than balance sheet gymnastics.

Most of your argument here is in favor of liquidity, but that's not the issue in question.

You're also mistaking the role of stock exchanges, which are secondary markets. It's rare for companies to issue new shares to raise money. Not only does it send a bad signal and piss off existing shareholders, but its also one of the least efficient ways of getting capital. They'd prefer long-term debt.

[grandalf]

> For a proper debunking, you need to address the fact that it's usually pretty easy to wring cash out of a business, but you can only do it once.

I don't think that's the primary point, because the CEO should have an incentive to profit from multiplying the future value of that cash, not simply "wring it out" and get a short-term bonus. I meant to lump in "wringing" with all other perverse-incentives for management that a short-term incentive structure creates.

> That's why longer term investments are preferable.

In the same sense that it's better for an employee to receive a single paycheck for the entire year on day 1 of employment. That is not necessarily realistic. If investments were not reversible there would be a lot less of them, just as there would be fewer hires if the entire salary had to be paid on day 1.

> It puts the focus on building sustainable value for its owners rather than balance sheet gymnastics.

Building sustainable value? There are a lot of assumptions baked into that idea. One person's sustainable is another person's "safe" course of action and another person's definition of greed. Suppose someone is starting a restaurant and expects it to be profitable starting in year 10. Most people would consider that foolhardy. Is it? Not necessarily, it depends on how profitable it will be. Notably firms like McDonalds were profitable fairly rapidly but grew in scale significantly over time. Where did the tradeoff between sustainability and short-term greed occur? Arguably early investors were not greedy enough, since the firm had to resort to franchising to fundraise.

> You're also mistaking the role of stock exchanges, which are secondary markets.

I am not sure how the Long-Term Stock Exchange will work, but my point is that simply restricting the behavior of firms that join the exchange will not necessarily change the behavior of that firm's employees, except to the extent that investors/owners are able to create long-term incentives.