August 03, 2018

The Stock Exchange should report, in real time, the current average holding period for each security.

Sir, Megan Greene writes: “The average holding period for a security on the New York Stock Exchange has fallen from two months in 2008 to just under 20 seconds today, according to analysis from Cumberland Advisors” “Passive investing is storing up trouble” August 3.

I had no idea we were into holding periods measured in seconds. Some years ago U.S. Sen. Mark Warner mentioned "The average time someone used to hold a share of stock back in the ’60s was eight years.”

Seeing this, it’s clear the stock market should begin to report the individual holding period for each security. Any ordinary investor, who makes his own slow analysis to come up with a decision whether to buy or sell, I assume would not really want to be competing against computers working in milliseconds… distant from fundamentals.

And Megan writes about the systemic risk present in “Passive investments… Often set up to mimic an index, ETFs have to buy more of equities rising in price, sending those stock prices even higher…creates a piling-on effect as funds buy more of these increasingly expensive stocks and less of the cheaper ones in their indices — the polar opposite of the adage “buy low, sell high” … [with] no regard for underlying fundamentals”.

In that Megan is not very far away from that systemic risk I so often write to you about, namely that of higher capital requirements for banks against what is perceived safe than against what is perceived risky. First, those capital requirements take no consideration of the purpose of the credit; and second they are the polar opposite of what they should be, since what is perceived as safe is in fact much more dangerous to our bank systems than what is ex ante perceived as risky.