Hail Mary Pass !!!!
Hail Mary Pass!!!!
Ganga Prasad Rao
http://myprofile.cos.com/gangar
For once, I am glad I didn't graduate in finance! Why, I'd be burned with flame-mail for the sacrilege I am about to commit!
Much attention has been devoted to the study of volatility in equity markets. Many have reached the conclusion it is the search for short-term 'rents' - overnight profits from 'get-rich quick' derivatives - that is to blame. But greed being what it is, it is inconceivable to mandate the elimination of short-term trading opportunities (though, and at a tangent, I can see why speculators are no longer necessary in 'mature' commodity markets). Many also subscribe to the viewpoint markets should reward those 'enterprising' investors who pay to acquire superior information and do their 'homework' over less agile or less alert investors. So, how do we go about designing a solution that rewards 'good' investment behavior over 'bad'? Read on!
The core idea is that every firm on the stock market annually rewards its long term investors exclusively in some proportion to the holding period of their stock purchases. If a firm disbursed 'shareholder appreciation bonus shares' end of year, then investors would have an incentive to desist from short-term profit-booking. But wouldn't the 'bonuses' dilute the investor's equity capital? The answer? No, not if properly designed. A firm buys 'short shares' in the market and issues them, in whole or part, as year-end bonuses to its 'long shareholders'. There is no dimunition in stock value because shares are not 'created anew' from 'splits' or 'rights''; ie, the equity base of the firm stays unchanged. If all listed firms adopted this program, we would have a market in which the incentives are no longer skewed toward 'here and now' behavior. Short-term traders and trades would very much exist but no longer inordinately influence the broader market. Short trades would likely occur less frequently in response to temporary large arbitrages gaps, or 'hot' information overlooked by or otherwise unknown to the 'ornery investor - opportunities which the short investors perhaps rightfully claim as their 'domain'.
So much for the 'concept'. Now the mechanics made easy. The stock exchange first 'tags' every equity share in every investor's portfolio with a 'w', 'm', 'q', or 'L' according to holding period. That's easy given the electronic transactions records and the massive computing power that we now have at hand (Cloud computing, there's gotta be a use for it, right?!) The 'L' shares are further classified in to 'L1', 'L2', ...., 'L9' and 'L' depending upon the number of years held. Each firm institutes a 'legal' program, if at an arm's distance, that buys the 'w'- , the 'm'- and the 'q'-class shares whenever it feels the value is below long-term value (and sells them in over-heated markets). (This should come as no surprise to the financial whizzes who split stocks or 'buy-back' shares to shore up stock prices). Accumulated shares are 'distributed' end of year (or, by some other schedule) to long-term investors in some proportion to their holding period. Firms participate in the program (and disburse bonus shares) to different extents, consistent with the state of their financial health and their view of long term prospects among other factors. If the firm's arm bought a net of 1 million 'short' shares over the year, and it has a total of, say 100 million-year 'L(x)' shares on its books, it issues 1 share for every 100 'long-share-years' held by the investor. The wizened old guy holding 100 'L' shares (100 x 10 = 1000 long share-years) earns 1/100X1000 = 10 shares as his year-end bonus. The 'short-turned-long investor' with 100 'L1' shares, receives 1 bonus share to start with. 10% bonus for the 'long glasses' ain't something to sneeze upon?
Think about it. You don't have to play the market by the hour, day or week to make an honest return. Hold long and add to your capital. And the bonus shares do not eat in to your capital appreciation either! The proposal doesn't require a massive overhaul of the markets. It is straightforward and easy to implement. There may be a thousand minor details to worry about (in particular, financing of the scheme and its 'legitimacy'), but the core idea stands. Reward the 'long glasses' by exploiting the 'externality' caused by the impatience of the 'short yuppy', and the various opportunities thrown up by the market over the course of the year.
'Long-term shareholder value creation' ain't merely a buzzword in speeches and Annual Reports? Or, is it?
Ganga Prasad Rao
http://myprofile.cos.com/gangar
For once, I am glad I didn't graduate in finance! Why, I'd be burned with flame-mail for the sacrilege I am about to commit!
Much attention has been devoted to the study of volatility in equity markets. Many have reached the conclusion it is the search for short-term 'rents' - overnight profits from 'get-rich quick' derivatives - that is to blame. But greed being what it is, it is inconceivable to mandate the elimination of short-term trading opportunities (though, and at a tangent, I can see why speculators are no longer necessary in 'mature' commodity markets). Many also subscribe to the viewpoint markets should reward those 'enterprising' investors who pay to acquire superior information and do their 'homework' over less agile or less alert investors. So, how do we go about designing a solution that rewards 'good' investment behavior over 'bad'? Read on!
The core idea is that every firm on the stock market annually rewards its long term investors exclusively in some proportion to the holding period of their stock purchases. If a firm disbursed 'shareholder appreciation bonus shares' end of year, then investors would have an incentive to desist from short-term profit-booking. But wouldn't the 'bonuses' dilute the investor's equity capital? The answer? No, not if properly designed. A firm buys 'short shares' in the market and issues them, in whole or part, as year-end bonuses to its 'long shareholders'. There is no dimunition in stock value because shares are not 'created anew' from 'splits' or 'rights''; ie, the equity base of the firm stays unchanged. If all listed firms adopted this program, we would have a market in which the incentives are no longer skewed toward 'here and now' behavior. Short-term traders and trades would very much exist but no longer inordinately influence the broader market. Short trades would likely occur less frequently in response to temporary large arbitrages gaps, or 'hot' information overlooked by or otherwise unknown to the 'ornery investor - opportunities which the short investors perhaps rightfully claim as their 'domain'.
So much for the 'concept'. Now the mechanics made easy. The stock exchange first 'tags' every equity share in every investor's portfolio with a 'w', 'm', 'q', or 'L' according to holding period. That's easy given the electronic transactions records and the massive computing power that we now have at hand (Cloud computing, there's gotta be a use for it, right?!) The 'L' shares are further classified in to 'L1', 'L2', ...., 'L9' and 'L' depending upon the number of years held. Each firm institutes a 'legal' program, if at an arm's distance, that buys the 'w'- , the 'm'- and the 'q'-class shares whenever it feels the value is below long-term value (and sells them in over-heated markets). (This should come as no surprise to the financial whizzes who split stocks or 'buy-back' shares to shore up stock prices). Accumulated shares are 'distributed' end of year (or, by some other schedule) to long-term investors in some proportion to their holding period. Firms participate in the program (and disburse bonus shares) to different extents, consistent with the state of their financial health and their view of long term prospects among other factors. If the firm's arm bought a net of 1 million 'short' shares over the year, and it has a total of, say 100 million-year 'L(x)' shares on its books, it issues 1 share for every 100 'long-share-years' held by the investor. The wizened old guy holding 100 'L' shares (100 x 10 = 1000 long share-years) earns 1/100X1000 = 10 shares as his year-end bonus. The 'short-turned-long investor' with 100 'L1' shares, receives 1 bonus share to start with. 10% bonus for the 'long glasses' ain't something to sneeze upon?
Think about it. You don't have to play the market by the hour, day or week to make an honest return. Hold long and add to your capital. And the bonus shares do not eat in to your capital appreciation either! The proposal doesn't require a massive overhaul of the markets. It is straightforward and easy to implement. There may be a thousand minor details to worry about (in particular, financing of the scheme and its 'legitimacy'), but the core idea stands. Reward the 'long glasses' by exploiting the 'externality' caused by the impatience of the 'short yuppy', and the various opportunities thrown up by the market over the course of the year.
'Long-term shareholder value creation' ain't merely a buzzword in speeches and Annual Reports? Or, is it?
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