Would you be more inclined to stay invested in a stock if your holding was somehow growing automatically?
29-Sep-2023 •Dhirendra Kumar
Some five years ago, I wrote a column on an American startup called 'Long-Term Stock Exchange'. Before I tell you anything more, I'd like to point out that the venture has, for all practical purposes, failed. However, the idea was genuinely interesting. An entrepreneur named Eric Riese decided to find a way to cure short-termism amongst equity investors, so he came up with the idea that people would invest for the long-term if their holdings in a stock automatically increased as time went by.
Of course, the holding can't grow so he modified the concept and decided that the voting rights for each share should go up. He decided to set up a stock exchange where this kind of automatic adjustment would happen to companies that were listed on it. This sounds like a weird concept, and it is. But America is a weird country, so not only did he get venture funding for this exchange (from no less than Marc Andreesen) but also got permission from the regulator, SEC, to set up this exchange. Needless to say, nothing much came of this startup exchange. Still, it's better to have tried something fundamentally innovative which tackles a difficult problem and then fail, rather than failing at yet another copycat startup as so many others do.
The underlying problem is perhaps the most serious one in equity investing. Many, perhaps most investors have an unbelievably short-term perspective. They have a definition of long-term which is ludicrously short. If you listen to social media discussions on the issue, you will find that opinions are divided, ranging from a high of seven months to a year down to anything that is not day trading. Even the government's official definition is just one year!
Some years ago, Fidelity Investments conducted a study in the US to find out what kind of investor accounts had the best returns. It was observed that the greatest returns came from investors who had neglected their investments for several years, or even decades. Interestingly, many of these investors had passed away a long while back - the ultimate in do-nothing long-term investing. Even though one cannot recommend this as a strategy, it's nonetheless an interesting finding.
In recent times, I have felt that one of the root causes of investors not venturing into long-period investments was simply not wanting to do the work in understanding a business. When you invest for the typical few days to weeks, you just need to have a view of the stock movement, it's enough to just have a view on the stock price - there is no need to know anything about the company itself. However, if you do invest for a year or years then you have to have a view on the company, the sector, the underlying business, the management - in fact, everything about the business itself.
There are two problems with this. One, investors do not have the time. And two, in this age of sentence-length media and social media, they do not have an attention span. This sounds like the same problem but it isn't. It can take days to understand the basics of a business and even when they have the time, I find that the patience required to understand a company is simply not there. Most of the investing world is complex and if anyone gets used to the information style of Twitter or Instagram, then understanding complex things becomes almost impossible.
For investors who want to invest in a long-term, fundamentally driven way but cannot spare the time, it's best to outsource the attention and the research to a mutual fund, or a stock advisory platform like www.valueresearchstocks.com. If that's all you want, it's fine. If you want to use these as a stepping stone to do more yourself, then that's even better.