22 September 2011
Investors’ increasingly short-term outlooks are bad for the ability of markets to create value and of economies to recover from recessions, former US vice-president Al Gore said at the Discovery Investec Leadership Summit in Johannesburg on Wednesday.
“I think we really do need to work for change in capital markets and not be so focused on the short term,” he told a Discovery leadership summit in Johannesburg.
“The increasing short-term focus for investment decisions and business planning has been harmful to creating sustainable value.”
This could be the reason it was taking longer for economies to recover from recessions.
He said the period of time taken after recessions to restore the economy and jobs had been stretching out considerably.
It changed from about six months after World War II to the over two years, or more, of today.
Investors used to retain stocks for six to seven years, but now they sold them after less than a year, he said.
“As it happens, the average period for 75 percent to 80 percent of real building up of value is six to seven years,” Gore said.
“But, if investors are getting in and out of stock in just a few months, that does not synchronise with the long-term build-up of value.”
There was now an increasing focus on even shorter investment time-periods.
“On many exchanges in the world today, 50 to 60 percent of trades are high-speed, high-frequency,” Gore said.
This led to “flash crashes” on stock exchanges, where the value of the market dropped significantly and recovered in a very short time period.
“One of the proposed remedies to flash crashes was a new rule that caught my attention … an offer to buy or sell has to remain open for one second. The reaction to this proposal was, ‘Oh no, the whole system will collapse’.”
Although these short-term trades could serve a purpose, they caused more harm.
“I don’t think the value they add is anywhere close to the risk that they cause,” he said.