Saturday, 6 June 2009

Keynes on short/long-termism

I'm killing a bit of time when I should be packing stuff for our first ever family holiday (as in the three of us) which will be a few days up on the North Norfolk coast. I just been flicking through the General Theory for something to do and it reminded me how great the whole of chapter 12 is. Many of Keynes' insights apply just as much today, and are very relevant to the continuing discussion about investor short-termism. There are quite a few famous passages in this chapter, so I've pulled out few other bits that l like.
In abnormal times in particular, when the hypothesis of an indefinite continuation of the existing state of affairs is less plausible than usual even though there are no express grounds to anticipate a definite change, the market will be subject to waves of optimistic and pessimistic sentiment, which are unreasoning and yet in a sense legitimate where no solid base exists for a reasonable calculation.

......

[T]he professional investor is forced to concern himself with the anticipations of impending changes, in the news or in the atmosphere, of the kind by which experience shows that the mass psychology of the market is most influenced. This is the inevitable result of investment markets organised with a view to so-called "liquidity". Of the maxims of orthodox finance none, surely, is more anti-social than the fetich of liquidity, the doctrine that it is a positive virtue on the part of investment institutions to concentrate their resources on the holding of "liquid" securities. It forgets that there is no such thing as liquidity of investment for the community as a whole. The social object of skilled investment should be to defeat the dark forces of time and ignorance which envelope our future. The actual, private object of the most skilled investment today is "to beat the gun", as the American so well express it, to outwit the crowd, and to pas the bad, or depreciating, half-crown to the other fellow.

......

Investment based on genuine long-term expectation is so difficult today as to be scarcely practicable. He who attempts it must surely lead much more laborious days and run greater risks than he who tries to guess better than the crowd how the crowd will behave; and, given equal intelligence, he may make more disastrous mistakes. There is no clear evidence from experience that the investment policy which is socially advantageous coincides with that which is most profitable. It needs more intelligence to defeat the forces of time and our ignorance of the future than it does to beat the gun. Moreover, life is not long enough; - human nature desires quick results, there is a peculiar zest in making money quickly, and remoter gains are discounted by the average man at a very high rate.

......

When the capital development of a country becomes a by-product of the activities of a casino, the job is likely to be ill-done. The measure of success attained by Wall Street, regarded as an institution of which the proper social purpose is to direct new investment into the most profitable channels in terms of future yield, cannot be claimed as one of the outstanding triumphs of laissez-faire capitalism - which is not surprising, if I am right in thinking that the best brains of Wall Street have been in fact directed towards a different object.

......

Most, probably, of our decisions to do something positive, the full consequences of which will be drawn out over many days to come, can only be taken as a result of animal spirits - of a spontaneous urge to action rather than inaction, and not as the outcome of a weighted average of quantitative benefits multiplied by quantitative probabilities. Enterprise only pretends to itself to be mainly actuated by the statements in its own prospectus, however candid and sincere. Only a little more than an expedition to the South Pole, is it based on the exact calculation of benefits to come. Thus if the animal spirits are dimmed and the spontaneous optimism falters, leaving us to depend on nothing but mathematical expectation, enterprise will fade and die; - though fears of loss may have a basis no more reasonable than hopes of profit had before.

What I like about this chapter is the clear emphasis on our inability to know the future. Despite all the forecasting that goes on, and the fiendish mathematics employed in the City, this is a barrier that we can never get over and we always need to be aware of this.

By the by, despite Keynes' criticism of liquidity fetishism he does acknowledge in this chapter that you need a given level of liquidity in order for investing to be more attractive than simply hoarding and/or loaning money. However he also suggests that there should be a substantial tax on transactions in order to discourage speculation.