Cultish long-termism can hobble investors
Cryptocurrency mania shows the dangers of followers falling for fanciful narratives
by Izabella Kaminska
© Bloomberg
In the aftermath of the global financial crisis, in 2010 Andrew Haldane, then the executive director of financial stability at the Bank of England, wrote a seminal paper espousing the virtues of patience in financial markets.
According to Mr Haldane, now the bank’s chief economist, many studies had drawn a link between patience and growth and, conversely, between impatience and under-saving. The latter was thought to have adverse implications for long-run investment and growth. Unfortunately, he noted, impatience in the market was mounting.
Some of this, Mr Haldane suggested, was connected to financial innovation that encouraged short-term investing styles. High-frequency trading in particular, he argued, was leading to increased market volatility. For growth to really take off, more patience was needed.
Looking at the market today, however, it is hard to believe things are as simple as that. Take the growing number of established but lossmaking (or just-about break-even) businesses that have emerged from the tech sector — Uber, Tesla or Snap, for example. Companies like these exist largely because investors’ attitudes in recent years have become uniquely forgiving and long-termist in nature.
Of course, many authoritative investors and academics share Mr Haldane’s view of the deleterious effects of excessive short-termism. Many point to the requirement for public companies to update investors on their financials on a quarterly rather than yearly basis.
The practice, it is argued, draws the attention of investors away from long-term productivity-enhancing investment and towards activities that drive short-term returns and profits — stock-purchase programmes, financial arbitrage or predatory mergers and acquisitions focused on asset-stripping or monopolisation. The result is that low-value-added businesses are financed, while those with the capacity to innovate are not. And the implications for growth are negative.
Understandably, keeping companies private for longer (protected from the pressures and scrutiny of short-termist shareholders and investors) is now held up as a logical strategy for high-tech businesses with transformative ambitions.
Unfortunately this thinking has had two unintended, negative consequences. The first is the rise of the overly patient, and so potentially gullible, investor. The second is the rise of the sort of idealistic long-term thinking that can detach financial markets from reality entirely.
While there is little doubt that too much short-termism has negative effects, one should not assume that it follows that extreme long-termism is always for the best. The latter can be dangerous when long-term thinkers fall for fanciful narratives or investor cults.
In such cases, investment decisions are driven not by a realistic evaluation of what is or is not possible, but rather by the grandeur of the futuristic visions being touted. If the tale is bold enough — especially if it appeals to entrenched biases, belief systems or desires — the more likely an excessively patient investor is to forgive failure on the grounds that the end justifies the means. Whether the venture being invested in has scant chance of operating without losing money matters little at this point. The investment is now a religion.
Nowhere is this mindset more clearly displayed today than in the realm of cryptocurrencies, where narrative trumps reality on a daily basis. Whether cryptocurrency schemes are cultivating value for future generations, or are in fact systems whose growth depends on an elaborate bluff or deception, is impossible to evaluate. When the endless deferral of gratification becomes an end in itself, settling that question is more a matter of faith than quantifiable reality.
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