Avoiding Short-Termism in Investment Decisions

Avoiding Short-Termism in Investment Decisions

Jack Gray had been on tour to India wherein he addressed members across four cities viz. Mumbai, Delhi, Bangalore and Chennai. He presented the benefits as well as pitfalls of both the long termism and short termism in investments.

Some of the reasons of short termism are (1) neurological like the limbic portion of the brain which has been advantageous in primitive ages, (2) temperament, (3) our organisations and (4) nature of the markets. Long termism is neither a panacea for investment virtue nor a paragon. Shocks during retirement can be costly. One may suffer from disposition effect and the fear of regret. Likewise excessive short termism leads to distortion in opportunity. Momentum and trend following may create private gains at public cost. Since 1965 the turnover of the US equity mutual funds have increased from less than 20% to more than 100% by 2005. The average holding period for stocks has reduced to 4 months. In a study carried for 942 US equity mutual funds with 10 year history, the returns of those funds which had lower turnover was in higher quartile. The inverse relation means the more you trade the less you make as an investor. And most of them are guilty of short term approach – with 89% of participants from media, 81% of financial planners, 68% of the consultants admitting the same.

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Jack suggested 5 steps to long termism – recognize and struggle against barriers, use anchors of long term value add, be selectively sensitive to the short term but avoid Gresham’s laws of investing, develop meaningful strategic partnerships, and develop & use investment beliefs including long term investment statement. To avoid short termism one should realize that excessive is a sin, learn to exploit benefits of long term and have courage and wisdom.

About the speaker:        

Jack Gray is director at the Centre for Capital Market Dysfunctionality at the Sydney University of Technology. He is also a special adviser to Brookline, an alternative asset specialist. Previously, Jack worked at GMO in a broad global role based in Sydney. In 2003, he worked at Sunsuper, a $10 billion not-for-profit financial services organization, as its first chief investment officer. Prior to his job at Sunsuper, Jack worked for a number of years at GMO in Boston as a product specialist for global asset allocation and quantitative international equities, as well as a member of their U.K. investment committee. For 10 years, he worked at AMP Asset Management in Sydney in a variety of roles, including quantitative research, business strategy, marketing, and client relation. Jack joined AMP Asset Management after a 20-year academic career in pure mathematics, the history and philosophy of mathematics, and industrial consulting.

Jack is an active member of a variety of industry bodies. He is regularly invited to speak at international and domestic conferences on investing and publishes regularly in both popular and professional journals.