FT Alphaville tipped us off to a speech given by the Bank of England's Andrew Haldane earlier this month where he discusses "Patience and Finance". We'll write a bigger blog in a day or so to discuss this magnificent paper and its implications for markets and investors. But one of the key things we want readers to understand is that the trend to short termism of which the so-called "flash" traders are the most obvious recent iteration is an evolutionary manifestation of an intellectual version of Gresham's law. That is impatience is chasing out patience as the holding period for investors and traders is shortened to such an extent that it becomes difficult, nay impossible, to hold a medium term view.
Haldane says "In 1940, the mean duration of US equity holdings by investors was around 7 years. For the next 35 years up until the mid-1970s, this average holding period was little changed. But in the subsequent 35 years average holding periods have fallen secularly. By the time of the stock market crash in 1987, the average duration of US equity holdings had fallen to under 2 years. By the turn of the century, it had fallen below one year. By 2007, it was around 7 months. Impatience is mounting."
And this is before flash traders and their super computers who knows how short the average holding period is now?
Short termism and impatience is no good for anyone, evolution has shown us that. We'll talk more about this paper later but for the moment it tells us that nothing substantial or concrete can be garnered from day to day or even week to week moves in markets. They'll just be following the data, thin slicing and finding a way to make a quick buck. Indeed given the fundamentals in Europe and the United states we'd say that equity markets are currently sending the wrong signals. Time will tell.
Link to the speech: http://www.bankofengland.co.uk/publications/speeches/2010/speech445.pdf
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