Calm down dear!


Lustrum trading, a solution to market hysteria?

Lustrum trading is a simple concept, it proposes that:

Shares for each listed company should be traded once every 5 years – on one day – 3 months after the company makes its lustrum (5 year) dividend.

Rational or hysterical? You decidePanic Button

Ever wondered why, if markets are so rational, there is so much talk of “market confidence” and “market sentiment”?

Recent times have shown the clearest indication yet of the real power within our societies. The Eurozone crisis has been precipitated by credit ratings concerns and banks have failed to pass on the bounty of Quantitative Easing to businesses which make actual stuff. Politicians, technocrats and commentators have paid attention to only one constituency, the markets. The emotional state of the markets; the happiness, or otherwise of the bankers, seems to have been pretty much the most important issue in the world.

Whilst this is undoubtedly bizarre, it might make sense if the markets could be said to be more rational, more objective or somehow more able to take decisions for the common good than politicians and others who might be said to have narrow or subjective agendas.

Yet markets are not objective – in any way. They are not even supposed to be. Their goal is to seek profit, and often profit lies in market movement and, if you are a hedge fund, in volatility.

As with any crowd behaviour, markets move relative to the herd, not through rationality. Markets are innately hysterical, not rational.

Man leaves bank for while to get some sleep, panic!

Let’s take a recent example. Last year, in the UK, the part taxpayer owned bank, Lloyds, temporarily lost its CEO, Antonio Herta-Osaria, who took a leave of absence due to overwork.

The market reaction? Lloyds stock immediately lost 25% of its value.

But what had really changed in the fundamentals of the business? Had 25% of its mortgage customers defaulted? Had bad debts increased? No, the underlying nature and purpose of the business was unchanged from the previous day.

All that changed is that one man in a suit decided he needed a break. It’s not really news is it?

This is not to say that profit warnings and temporarily departing men in suits do not have some relationship to the future viability of a business, it’s just that markets are unable to act proportionately because of the herd mentality. No-one wants to be left behind so everyone stampedes and people get crushed underfoot.

Sustainability requires long term thinking

It’s time to move away from market hysteria, market sentiment and market confidence. Such emotionally volatile behaviour does not deliver the rational, logical, evidentially based decision making that ought to be at the heart of building and maintaining the security and prosperity of the human species.

This was recognised in June 2011 when the UK government commissioned the respected economist John Kay to review how the equity market functions and to suggest better long term incentives.

In a speech revealing some of his preliminary thoughts earlier this month, Kay noted that the practice of quarterly company reporting was a factor in preventing the development of long term thinking. Of a number of consultees to the review; “Many considered quarterly reporting and interim management statements to be ‘useless or misleading’”.

The link between short termism and unsustainability is clear and well established. Where short term profit taking provides overwhelmingly larger rewards than long term stewardship then sustainability will never be a priority for either companies or markets.

Yet we do not believe that abolishing quarterly reports goes far enough. Not by a long shot. Longer timescale solutions are required.

So, what to do? Towards Lustrum (a period of 5 years) Trading

One provocative proposal is to try to minimise the sub-second hysteria of the recent years in finance by radically restricting trading in shares and, through this, allowing companies to respond to the fundamentals of resource supply, customer demand and wider environmental and social trends without the distractions of the emotional meltdowns of the market.

Shares for each listed company should be traded once every 5 years – on one day – 3 months after the company makes its lustrum dividend.

Companies should report their ecological, social and economic performance annually, yet their decision making should not be affected by share trading which acts only in the interests of share traders, not in the interests of the company, economy, the planet, society at large or even the real asset owners (share and pension holders).

Naysayers may say: “Nay!” and argue that 5 years presents a cover which would allow all sorts of dodgy company behaviours and that the scrutiny of the market presents a guard against nefarious activity. However if that were true then our current market would bear this out. It does not; recent years have been littered with scams, corruption and failed companies. Companies will continue to rise and fall, through fair means or foul under lustrum trading, but the overall outcome just might be a more sustainable one.

This shouldn’t put all investors out of work, it also shouldn’t prevent individuals from buying and selling shares. On any given day a multitude of companies will have shares available to trade, just not all of them all of the time.

We have to find our way away from hysteria and to design markets and economies which automatically value and reward long term success, stewardship and social utility. Trading a company’s shares once every 5 years might be a valuable contribution to this goal – the idea might not be bulletproof, but it is interesting!

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