“The ability to discipline yourself to delay gratification in the short term in order to enjoy greater rewards in the long term, is the indispensable prerequisite for success.” – Brian Tracy
It’s been over a year, so here is another weekly edition of Blogger Wisdom. As we have done in previous years we asked an esteemed group of finance bloggers a series of (hopefully) provocative questions. Their answers are unedited and the author’s name, blog name and Twitter handles follow. We hope you find something of interest below.
Question: I am intrigued by the idea of the Long-Term Stock Exchange. Do you think it has the potential to open up the capital markets in new and meaningful ways? Or is the LTSE up against entrenched interests who simply too powerful? (Answers are in alphabetical order.)
It’s intriguing, but retooling how IPOs and the capital markets work is easier said than done. There we need to be a lot of interest behind this idea for it to stand a chance at mass adoption. However, finding new ways for investors and CEOs to focus on long-term performance over the short-term is never a bad thing.
The goals are admirable, but the whole idea seems like a long shot. Will both sides really give up enough to make it work?
It’s a great idea, but I’m skeptical. The long run is just a continuous short run. There’s no rule in the existing exchanges that managers and investors must think and behave in the short term. Some of the most successful public-company CEOs–like Jeff Bezos, John Malone and Warren Buffett–are famously long-term operators who take advantage of opportunities created by short-term thinkers. The problem this seeks to solve–too few companies coming to the stock market at an early stage–is better solved by amending or eliminating Sarbanes-Oxley. And the main beneficiaries of the LTSE will be entrenched management teams. Entrepreneur founders can achieve the same end on the existing exchanges with different share classes of super-voting and/or non-voting shares as the founders of $GOOG and $FB have demonstrated.
I truly mean no offense, especially to Marc Andreessen, who will soon unfollow me after this answer, but it seems to me that the Long-Term Stock Exchange is a misguided and ill-informed idea. It might sound attractive at first blush, but that’s because it capitalizes on things we want to believe are true, all of which are wrong.
The presupposition that quarterly earnings and management guidance somehow breeds short-termism and suboptimal business strategy has very little evidence supporting it. Moreover, there is an argument that reducing the periodicity of reporting (as in, go from quarterly, to semi-annually, or yearly) would actually increase the potential for chicanery (by bad management, or by cheaters with inside info).
And stock-market winners aren’t shrinking R&D budgets, for goodness sakes. Those facts speak for themselves.
Oh, and it is short-sellers that suss out the dodgy behaviour. We need them. They make markets more efficient, not less. They keep widows and orphans from overpaying for bad companies. Any exchange that attempts to keep short-sellers out will be more prone to fraud, and to mispricing.
In conclusion, the consequence of having a portion of shareholders focused on short-term datapoints doesn’t necessarily imply short-term management of companies, at all. So bring on continuous reporting, bring on all kinds of investors, bring on liquidity, and bring on more market efficiency. Doing the opposite would be bad for capitalism, not good.
The Long-Term Stock Exchange is a solution to a problem we don’t have.
It’s an interesting concept, but I can’t see it ever becoming mainstream. It might work for those who are HNW but not HNW enough to get into the PE/VC pre-IPO investments that might be attractive to them, but it’s a limited market. I guess it might also convince a few more founders to go public, but TBH until the PE/VC capital dries up (which it surely will at some point?), I can’t see this taking off.
I think the LTSE is a bit of a gimmick that warrants skepticism.
I’m on the board of directors of LTSE and Collaborative Fund is a major investor, so needless to say I am optimistic.
I can’t say that I know enough about the LTSE to feel strongly one way or another about it. On one hand, I do agree that short-termism can be a problem on Wall Street. On the other hand, we have also seen CEOs and founders achieve success under the current system by cultivating a long-term narrative around their vision that investors can coalesce around.
Whatever the outcome, they have a long, uphill battle ahead of them. Inertia is a powerful force in finance. The recent direct listings of Spotify and Slack are encouraging in the sense that they are large, well-known companies that were willing to challenge the status quo of traditional IPOs. If the LTSE can find a couple of unicorns willing to take the plunge with them, they just might have a shot.
I believe an exchange created by VCs that increases the power of VCs through the limitation of shareholder rights and reduced activist involvement, yet pitched as something beneficial for investors and largely believed by the marketplace, is something you’d be unlikely to see when markets aren’t at an all-time high.
It’s hard to say without the legal details publicly available, but I’m skeptical of LTSE’s vision.
Color me skeptical. Venture capitalists already have a stranglehold on the best startups, limiting investor access when valuations grow fastest. An IPO is often their necessary evil – a liquidity event – but it comes with a price, loss of control. The LTSE strikes me as a way for VCs to have their cake and eat it too.
It’s telling that this issue is framed as old guard – East Coast elites (bad) – vs. new guard – West Coast elites (good), but if the LTSE succeeds it will likely be a case of meet the new boss, same as the old boss – just with less transparency and accountability.
The Long-Term Stock Exchange still doesn’t know what it wants to be. It is too early to be dogmatic. I want to tell you that short-termism is not a problem, and thus the LTSE is likely to fail. Short-termism is the present force that drives long-term value creation. The long-run is a series of short-runs, and intelligent management teams convey to their shareholders how they are generating value when the current period GAAP figures do not reflect the total value of the progress of the firm. You don’t need a stock exchange to do that.
You might need the equivalent of a bond syndicate, though, to find long-term holders for a stock, and thus avoid the problem of flippers and overtrading. That said, it would be easier to just list the stock and not IPO, because many of the most patient holders are the ones who own it when it is time to go public.
I agree with the many flaws in the current processes for companies wishing to enter the markets. It is indeed very difficult to succeed without investment banking help. That said, I really have no basis for evaluating this idea.
We know that individual stock ownership on the part of retail sized accounts has declined. We also know that short term trading is more commonly driven by algorithms reading data which makes much of what the LTSE is trying manage less important. Think back to 15 or 20 years ago, the obsession over earnings reports and whisper numbers (remember those) was far more intense than it is now and it seems as though the punishments and rewards for earnings misses/beats take on a much shorter duration than they used to. I would be surprised if LTSE changed much of anything.
I’m all for anything that promotes long-term investing. It’s better for investors, for companies and the economy. The problem is, it’s not so good for the investing industry, which makes its money from focusing minds on the here and now, and on yearly, or even quarterly, targets. Until that misalignment of interests is addressed, short-termism will remain the order of the day.
I love the idea. Opposing the entrenched interests is part of the appeal.
The bigger picture here is why do we have stock exchanges to begin with? The stock market in its current form was never some sort of grand plan. It just sort of evolved. The industrial era required large enterprises, and those large enterprises required capital. Thus began the concept of selling shares to the general public.Once the stock market big enough to effectively lead the economy, it had to be tamed and regulated, and now it’s the messy, conflicted beast it is today. But I don’t know that anyone in their right mind would have intentionally created a system in which the most important companies in the world raise capital in a mechanism that resembles a casino. As many of today’s tech unicorns have proved, large enterprises can be funded today with private equity capital that is less sensitive to every quarterly earnings “beat or “miss.” With technology companies requiring less capital today than the industrial giants of decades past, it could be that a larger share of the economy is driven by privately-held companies.
Each opportunity an investor is presented is accompanied by some aspect of sacrifice. That sacrifice could be safety, liquidity, or return. With LTSE, investors give up liquidity so they will have a higher demand for either safety or return, that’s what I’ll be watching as the concept emerges and if those benefits do indeed seem to surface.
Thanks to all the bloggers for their time and effort. Stay tuned for a new Blogger Wisdom question tomorrow.