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Building the Case for Long-Term Investing in Stock Markets: Breaking Free from the Short-Term Measurement Dilemma

  • Steven Lydenberg

Abstract

Many voices have been raised in recent years extolling the virtues of long-term investing, and condemning the short-termism in today’s stock markets. Pillars of our financial and business community — including the CFA Institute, the Business Roundtable, the Conference Board, the United Nations, the World Economic Forum, and the Aspen Institute — have all prescribed the long term as a cure for our short-term ills. An excessive focus on short-term profits has various detrimental effects. It causes corporate managers to misallocate assets. It introduces dangerous volatility into financial markets. It means society must divert productive resources to repairing environmental and social damage done in the headlong pursuit of profits. In a 2006 report, the Conference Board speaks for many when it describes the dangers of the short term:

On a macro-economic level, short-term visions are the cause for market volatility and the instability of financial institutions. From the micro-economic standpoint, they undermine management continuity and expose a public company to the risk of losing sight of its strategic business model, compromising its competitiveness. In addition, the pressure to meet short-term numbers may induce senior managers to externalize a number of business costs (i.e., the cost of a state-of-the-art pollution system), often to the detriment of the environment and future generations.1

Keywords

Stock Market Corporate Governance Stock Price Institutional Investor Pension Fund 
These keywords were added by machine and not by the authors. This process is experimental and the keywords may be updated as the learning algorithm improves.

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Notes

  1. 1.
    M. Tonello (2006) Revisiting Stock-Market Short-Termism. The Conference Board, New York, p. 42.Google Scholar
  2. 4.
    J.R. Graham, C.R. Harvey and S. Rajgopal (2005) “The Economic Implications of Corporate Financial Reporting,” Journal of Accounting and Economics, 40/1: 3–73.CrossRefGoogle Scholar
  3. 6.
    A. Rappaport (2005) “The Economics of Short-Term Performance Obsession,” Financial Analysts Journal, 61/3: 66.CrossRefGoogle Scholar
  4. 8.
    J.J. Siegel (2005) The Future for Investors: Why the Tried and the True Triumph over the Bold and the New. Crown Business, New York, p. xi.Google Scholar
  5. 10.
    J.C. Bogle (2005) The Battle for the Soul of Capitalism. Yale University Press, New Haven, Conn., p. 159.Google Scholar
  6. 11.
    As Peter Bernstein has pointed out, index investors do not actually believe that the market is a zero-sum game. They just act as if it is. They believe that the economy, like a rising tide, will benefit all players in the stock market. They believe in betting that the tide will rise, but not on betting that one ship will rise faster than another — see P. Bernstein (2005) Capital Ideas: the Improbable Origins of Modern Wall Street. John Wiley & Sons, Hoboken, pp. 120–1.Google Scholar
  7. 19.
    R.A. Monks and N. Minnow (2000) Watching the Watchers: Corporate Governance in the 21st Century. University of Pennsylvania Press, Philadelphia; J.P. Hawley and A.T. Williams (2000) The Rise of Fiduciary Capitalism: How Institutional Investors Can Make Corporate America More Democratic. University of Pennsylvania Press, Philadelphia.Google Scholar

Copyright information

© Steven Lydenberg 2009

Authors and Affiliations

  • Steven Lydenberg

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