Investors are holding on to shares for shorter periods of time. But does that mean they are too eager or focused on the short term?, asks Jan-Maarten Slagter

‘The ease with which investors can sell shares makes them bad caretakers of a company’s long-term interests’, according to economist Ha Joong Chan. The Cambridge-based academic thinks share capital should become less volatile.

Chang is not alone. A tax on trading, a compulsory minimal holding period for high-frequency traders and more say or dividends for long-term investors: it’s only a small sample of measures proposed to discourage short rides on the stock exchange.

Shares are changing hands ever more rapidly. In the 1960s, American investors would hold on to their shares for an average of eight years. In the first ten years of the new millennium this has shrunk to a mere six months.

Eager 

Critics are using these figures to show that investors are becoming far too eager. They are putting pressure on CEOs to present fat short-term profits even when this is potentially damaging to a company’s long-term perspectives.

Averages are dangerous and that goes for the average purchase periods of shares as well. The high-frequency traders who are performing hundreds of transactions a day with their computerised models are distorting the picture. Institutional investors’ watchdog Eumedion recently looked into the holding periods of six large investors, pension funds ABP and the health sector’s Zorg & Welzijn among them. The figure it came up with was 3.5 years. This sounds like quite a long time but ‘the large majority of Dutch shares, more than 80% of all portfolios, does not move for five years or more’, the report claims. About half is kept for at least ten years.

Small group 

Interestingly enough, the average period of 3.5 years remained stable during the period of Eumedion’s investigation. Big investors are small versions of the stock exchange. The large majority of investors hold on to their shares for years. But a small group of investors have been trading exceptionally frequently. Averages don’t mean much in a case like that.

Contrary to popular opinion, a short holding period is nothing to do with a company’s long-term strategy.

The biggest innovation of the stock exchange model is that it allows companies’ long-term investments to exceed investors’ holding periods. After a company collects the money following the introduction on the stock exchange, it’s up to the shareholders to either buy or sell. How often investors exchange their shares among themselves is irrelevant: the company can continue to plot its long-term course regardless. The capital is already in the bag.

Jan-Maarten Slagter is director of the Dutch Investors’ association Vereniging van Effectenbezitters (VEB).

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