Short-Term Talk, Long-Term Cost

CAMBRIDGE – The idea that financial markets are too focused on the short term is gaining ground in the media and among academics. And now it is attracting political attention in the United States.

Investors’ obsession with short-term returns, according to the new conventional wisdom, compels corporate boards of directors and managers to seek impressive quarterly earnings at the expense of strong long-term investments. Research and development suffers, as does long-term investment in plant and equipment. Similarly, short-term thinking leads major companies to buy back their stock, thereby sapping them of the cash they need for future investments.

None of this is good news for the economy – at least, it wouldn’t be, if it were real. Upon closer inspection, the supposed negative consequences of investor short-termism appear not to be happening at all.

While institutional investors do trade stock regularly, and sometimes rapidly, financial firms like Fidelity Investments, Vanguard, and other mutual funds have maintained 12-15-month holding periods for stocks for decades. Moreover, while much has been made of a new fringe of program traders that moves in and out of stocks in nanoseconds, the belief that this rapid computer-driven trading makes it impossible – or even difficult – for corporate managers to adopt a long-term perspective is not supported by the facts.