Friday, July 11, 2008


The chart (click to enlarge) shows annual turnover rate (churn rate) for shares of NYSE listed companies. The black axis (Y1) shows annual turnover increasing dramatically from 10 to 30 percent during 1940 to 1980. During 1998 to 2008, turnover increased from 76 to 139 percent. Time held (years) is shown on the red axis (Y2); each NYSE share was "held" continuously by an investor four to eight years, presumably before it was sold, during 1940 to 1980. In the last ten years, this "holding period" has been punctuated from sixteen months to down to less than 9 months.

  • Such a churn rate imparts higher transaction costs to investors; with greater trading also comes the risk of making greater mistakes.
  • An investment requiring 2 - 3 years time for the market to recognize potential increases in intrinsic value faces unprecedented opposition, in an environment that typically keeps its shares less than nine months before selling to buy another.
  • Corporate managements, under ever increasing pressure from stockholders, financial analysts, global competitors, and takeover groups sacrifice long-term strategic vision in the pursuit of beating "next quarter's earnings guidance."
  • In contrast, a group of Fortune most admired corporations for "long-term investment" had an average turnover rate of close to 60 percent in 2005.

Short-termism destroys wealth. CFA® Institute occupies the forefront in a vital challenge to raise awareness and to challenge the wide range of short-termism's stakeholders to exercise leadership in the effort to win a war against the unnecessary destruction of capital. CFA® Institute's excellent resources may be accessed here.

source: NYSE Factbook, Forbes, CFA® Institute, Jonathan Smith & Co.

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