The article “Overcoming Short-termism: A Call for a More Responsible Approach to Investment and Business Management” from the Aspen Institute delves into one of the most contentious issues in modern finance: the idea of short-termism and its effects on the financial industry as a whole. When I first read the article I agreed with all of the points made within. This is because I am a value investor at heart. The implication of this is that I feel that a company should aim to achieve sustainable growth instead of looking to maximize short term value. Looking at the supporters of this article, I feel that they also lean in this direction. For example, Warren Buffet descends directly from the Ben Graham school of value investing, and would greatly benefit from an stock market that would operate under the rules outlined in the article.
What I am less sure about is what the implications of the regulatory changes outlined in the article are. For example, raising the capital gains tax wouldn’t necessarily decrease price volatility, it would only deteriorate earnings of short-term traders. Just because their earnings deteriorate would not mean that they would change their strategy, however. Removing the limitations for capital loss deductibility would decrease the tax burden of a person that takes a loss, but it would not make that investment any wiser and would not make the person any more likely to hold onto said investment. In the end I do not thing regulatory changes are where we can make changes to stock market volatility, if we want to do that we should instead try to change firms on the micro level.
Short-termism is the result of the current system, and its structure. If companies on a micro level all strived to have sustainable long-term growth the market would be less volatile, as the underlying earnings would be more stable. What this functionally means is that companies should focus less on window dressing and cutting cost to improve short term earnings and more on developing a sound business model with the long term in mind. This would lead to a long term decrease in volatility, and would give an organic incentive for investors to have a longer-term window. This means that we would need to replace the current management fad for short-term modeling to maximize stock price with sustainable models, which would be incredibly difficult, and how to do that is out of the scope of this post. This also isn’t to say that this method would get rid of short-termism, but I feel that it would more effectively minimize it than regulation would.