Capital Misallocation

So after the last decade of bubbles and other malfunctioning capital allocation strategies we get this Wall Street Journal article. Apparently, high-frequency trading as a strategy on Wall Street is on the rise.

According to the article, there is now an increased focus by money managers on short-term strategies.

It also points out money managers have increased short term focus much of it related to the fascination with high-frequency trading. This extremely fast trading activity now apparently make up as much as two-thirds of trading volume in equities.

So now a 12-month target is too long-term? C'mon. This brings to mind a certain Seinfeld episode. Since 1990, we've gone from an average holding period of 26 months to a holding period of less than 9 months in the stock market. The rise of high-frequency trading sure isn't going to help reverse that trend.

Recently, Buffett and Bogle and 25 others signed a letter with the title: Overcoming Short-termism, calling for new incentives to discourage short-term trading practices in favor of long-term investing. Less casino capital...more patient capital. It appears to have been all but ignored so far.

In fact, at least based upon the Wall Street Journal article, the response of Wall Street seems to be the exact opposite of what the letter recommends.

"Risk-taking is an essential underpinning of our capitalist system, but the consequences to the corporation, and the economy, of high-risk strategies designed exclusively to produce high returns in the short-run is evident in recent market failures." - From the letter Overcoming Short-termism

" incentives to encourage patient likely to be the most effective mechanism to encourage long-term focus by investors. Capitalism is a powerful economic and societal force which, if properly directed, can have a hugely beneficial impact on society at all levels. By enlisting natural market forces and establishing incentives for market actors to modify their respective behaviors..." - From the letter Overcoming Short-termism

To me, the Wall Street Journal article on high-frequency trading says, in effect, that the instincts of many on Wall Street is to completely ignore the spirit of that letter. They're engaging in strategies that involve even more hyperactive short-term trading.

The Seinfeld episode where George Costanza finally implements an effective strategy to overcome his innately terrible instincts comes to mind. The title of that episode happens to be perfect: "The Opposite".

Seems much of Wall Street has the same lousy instincts of George and is hell-bent to act like him.

"If every instinct you have is wrong, then the opposite would have to be right." - Jerry Seinfeld speaking to George at Monk's Cafe in "The Opposite"

So maybe instead it's time for some on Wall Street to adopt George's strategy.

"A job with the New York Yankees! This has been the dream of my life ever since I was a child, and it's all happening because I'm completely ignoring every urge towards common sense and good judgment I've ever had. This is no longer just some crazy notion, Elaine, Jerry. This is my religion." - George Costanza in "The Opposite"

Who knows, it just might work.


Related post: Buffett & Bogle on Short-termism
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Capital Misallocation
Capital Misallocation
Reviewed by jembe
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