Capital Productivity

From a recent white paper by James Montier:

According to data from the New York Stock Exchange, the average holding period for a stock listed on its exchange is just 6 months. This seems like the investment equivalent of attention deficit hyperactivity disorder. In other words, it appears as if the average investor is simply concerned with the next couple of earnings reports, despite the fact that equities are obviously a long-duration asset. This myopia creates an opportunity for those who are willing or able to hold a longer time horizon.

James Montier: Was It All Just A Bad Dream? Or, Ten Lessons Not Learnt

The average holding period for stocks from the early 1930s until the late 1970s was in the 4 to 8 year range. So for 40+ years or so 4 years was the low end average holding period for stocks. In the 1980s it dropped below that to levels similar to that of the 1920s (the last time we obviously had troubles with excess speculation and leverage) to just under 2 years. Since then we've moved to the unprecedented level of 6 months. What Bogle calls "stock-renting".

When we should be teaching young students about long-term investing and the magic of compound interest, the stock-picking contests offered by our schools are in fact teaching them about short-term speculation. - John Bogle in his book, The Battle for the Soul of Capitalism

Intuitively, most know what happens to an asset like a automobile when it's rented vs owned. The adverse effect of a large % of US businesses being "rented" for 6 months at a time is not much different. With that time horizon, "renters" are not going to mind the store with long-term value creation in mind. This is major disadvantage over time. The wisdom and quality of investment decision-making by the owners and the executive management they place in charge determines future wealth creation. This is one of Berkshire's great assets...most of the shareholders are patient capital oriented. It's also more likely assets will be mispriced when such a short time horizon is the dominant force at work (ie. who cares if I paid too much...I'm gonna sell it to someone else who'll pay even more too much).

Very inefficient.

Check out the trends in our capital productivity numbers. Just after WWII it took around $2 of investment to produce $ 1 of GDP growth. Recently, this article by Byron Wien pointed out the following about trends in US capital productivity in the 1st decade of this century:

Because of profligate spending on over-priced housing and other assets that declined seriously, as well as deficit spending by the government, by the end of the decade it took $6 of capital to produce $1 of growth - Byron Wien

As for the "other assets" that Byron Wien refers to in the quote...think technology stocks circa 2000.

James Montier points out the situation does present opportunities for patient long-term investors. While that is true, I think the more significant point is that we've allowed a less effective system of capital development to evolve.

The result? Capital gets misallocated while improvements to standards of living end up below what they might otherwise be.

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Capital Productivity
Capital Productivity
Reviewed by jembe
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