Are Stock Markets Really Becoming More Short Term?

CAMBRIDGE – In a recent commentary, I examined whether increasing pressure from more rapid stock trading is inducing corporate managers to obsess more over quarterly results, impairing their capacity to run their firms for the long term. But I noted how pressures from governments and rapid technological change are potentially just as powerful as those from stock-market trading. How carefully can one plan for the long term in, say, the eurozone, if the currency itself is at risk? And how long should brick-and-mortar retailers’ time horizons be if distribution is moving online?

It is regularly argued (to the point of having become conventional wisdom) that cheap and easy portfolio reconfiguration, technical trading strategies, and investors’ moves from one sector to another force managers to pay too much attention to immediate financial results. And, as trading accelerates, the pressures increase. But, even if managers and boards at publicly traded firms focus excessively on their quarterly results, and even if median stock-holding periods have shortened greatly in recent decades, it is difficult to know whether stock-market trading has become more rapid in ways that would make managers pay even more attention to quarterly results.

We must draw some very basic – but insufficiently recognized – distinctions about averages. One way to measure the average stock-holding period and its change over the past quarter-century is to add up all holding periods of all investors at the end of the year and divide the total by a weighted average of the stockholders. The result – the mean – is the average holding period.

Alternatively, we might line up all of the holders from shortest to longest and check how the holding period for the one in the middle has changed – the median. Often, these two ways to measure an average will have the same result and show the same rate of change. But when they differ, the difference should affect our thinking about the phenomenon. For stock markets, the difference may be important.