Home / Future / Long versus Short is like Good versus Evil

Long versus Short is like Good versus Evil

I was honoured to be the guest speaker for the Worshipful Company of Information Technologists at their Quarterly Lunch yesterday.  The lunch was held at the Tallow Chandlers' Halls in the City …

Tallow Hall

… although the technologists are not candlestick makers, they know where to have a party.

Anyways, in the spirits of keeping my speeches for the record, here's what I said:

Master, wardens, ladies and gentlemen, thank you for inviting me here today.

And my theme is long-term investing versus the short-term. 

SHORT SELLING AND HIGH FREQUENCY TRADING ARE THE MANTRA OF TODAY’S INVESTMENT MARKETS.

It's worth discussing in depth, but we don't have time today, so here's the basics of how short selling works.

You have stocks which I borrow for a fee.

I then sell your stocks at a price of let’s say £10 and, due to the markets seeing the stocks sell in larger numbers, the price falls.

When the price is low enough, I buy the stocks back at let’s say £5, making a £5 profit on each.

I then give you your stocks back and, as you’re there for the long term, we both win in the short term.

You get a fee, and I get a profit.

It's greedy, but it's legal.

THE QUESTION IS WHETHER THIS IS BAD OR, RATHER, IS GREED GOOD?

Short-termism and making a quick buck, is not an issue is it.

It’s just greed that drives this behaviour and, as in the words of Gordon Gecko in the film Wall Street:

“Greed, for lack of a better word, is good. Greed is right. Greed works. Greed clarifies, cuts through, and captures, the essence of the evolutionary spirit. Greed, in all of its forms; greed for life, for money, for love, knowledge, has marked the upward surge of mankind and greed, you mark my words, will not only save this company, but that other malfunctioning corporation called the USA.”

SURE, GREED IS GOOD … IT HAS DRIVEN US FORWARD FOR YEARS.

THINK ABOUT IT.

All progress throughout history has been driven by short-term greed, no better illustrated than by the immortal words of Orson Welles in the Third Man:

"In Italy, for thirty years under the Borgias, they had warfare, terror, murder and bloodshed, but they produced Michelangelo, Leonardo da Vinci, and the Renaissance. In Switzerland they had brotherly love, they had five hundred years of democracy and peace, and what did they produce? The cuckoo clock."

Greed, like war, characterises humanity.

Greed is good.

Without greed, you would not have progress.

Without greed, there would have been no Renaissance.

Without greed, there would be no industrial revolution.

Without greed, there would be no British empire.

And without greed, there would be no information revolution.

And this is why we all focus upon the quick buck.

WHO, HERE, HAS NOT WANTED TO MAKE MONEY FROM THEIR HOUSE?

From their shareholdings?

From their investments?

You may say you invest and save for the long term, to pay off a mortgage and build a pension, but who here would not want to make a quick buck given the chance?

Who wishes they had invested in Microsoft when the shares were $1 … or Google … or Facebook?

And who here laments the fact that instead, they bought shares in Lotus … or Ask Jeeves … or Friendster?

We all want to make a buck and none of us is that bothered about the long-term.

That is because we are all driven by the same needs of instant gratification and instant need.

IT’S IN OUR NATURE.

Animals do not defer greed.

If you offer an animal unlimited food, they will eat until they can eat no more.

They have no patience as patience is a uniquely human characteristic.

No animal demonstrates patience like humanity, as it is part of how our brain is built.

WE CAN PROVE IT.

Before 50,000 B.C., very little happened.

The GDP of the planet stayed consistently low.

Then something changed.

In 50,000 B.C., Neanderthal man died out and homo sapiens took over.

What changed?

The Brain.

The pre-frontal cortex provides patience, whilst the limbic mid-brain around the cerebral cortex dominates with impatience.

Neanderthals had a short frontal lobe, which is why their forehead is angled, whilst their skull was larger at the rear to accommodate the cerebral cortex.

This is similar to most animals as the mid-brain dominates their behaviours.

As a result, animals are impatient by nature, and seek instant gratification to instant needs.

Then the homo sapien emerged.

The homo sapien's forehead is flatter and this change is due to the prefrontal cortex increasing in size to accommodate our ability to think rationally and, as part of this, to demonstrate patience. 

For the first time, an animal demonstrated the deferment of short-term pleasure for long-term gain.

Hence, patience is a virtue that homo sapiens discovered and is what characterises mankind and civilisations.

It is the reason why productivity increased so rapidly from 50,000 B.C. onwards.

We learned to think rationally and store food for the winter, rather than eat it today.

We learned to build houses, rather than live in caves.

We learned to farm, rather than hunt.

All of these skills required patience.

AND THIS IS WHY LONG-TERMISM IS IMPORTANT.

It is the reason why the Egyptians built Pyramids and the Church built Cathedrals.

It doesn’t focus upon net present value, but focuses upon leaving something wonderful for future generations and protecting such investments for the long-term.

There are many examples of how long thinking works.

One such example is New College Oxford which, being British, was actually established in 1379 and isn’t new at all.

The College’s Great Hall has this fantastic arched ceiling with oak beams.

After five hundred years, the beams were rotting so badly they needed to be replaced.

So the Dean of the College asked the groundsmen if they knew of anywhere to source some similar beams?

“Oh yes”, the head groundsman said. “Five hundred years ago, when they built the college”, he told the Dean, “the founders planted a forest of oaks of the same wood as the one’s used in the ceiling just over there.”

In other words, they had had the foresight to realise that, at a point in the Long Future, the ceiling beams would need replacing so they planted trees for just such an occasion.

THAT’S LONG THINKING.

Another example is the Dutch Government, who spent €450 million building the Maeslant barrier to protect the reclaimed land across the Coast of the Netherlands.

€450 million on an event that may never happen makes sense … because if it did, the cost could be, let’s say, €60 billion.

What could cost €60 billion?

The devastation and disaster caused by a major flood of the Dutch coast.

And this is also the cost of the sinking of the major American coastal city, New Orleans, in 2005.

Hurricane Katrina cost the USA over €60 billion.

If the USA had thought long, they would have spent the billion it would have cost to build the flood defences for the southern coastline, and saved themselves €60 billion.

THAT’S WHY LONG THINKING IS IMPORTANT, BUT WHO BOTHERS ABOUT LONG-TERMISM?

Who wants to invest in something that might pay off in a hundred, or a thousand or ten thousand years?

Well there are some people.

And they are called Long Finance.

Long Finance wants to protect this world by looking at net long-term value, rather than net present value.

AND WHY IS LONG THINKING IMPORTANT TODAY?

Some would say because our planet is screwed.

Others because it will be if we don’t change our ways.

And others would say we uniquely adapt, as demonstrated by carbon credits and clean biofuels to address climate change.

BUT CHANGING OUR WAYS IS NEVER EASY.

Especially as impatience is in our very nature and patience is something we’ve learned … and are still learning.

And, as we talk about short selling versus long finance, we will have a continual mismatch of needs and expectation.

For example, I heard a story the other day that reflects the long versus short debate well.

A banking friend of mine told me that his son came up to him the other night and asked: "Dad, how does capitalism work?"

His Dad says:

"Well son, let me try to explain it this way: I'm the breadwinner of the family, so let's call me the Capitalist.

Your Mum, she's the administrator of the money, so we'll call her the Government.

We're here to take care of your needs, so we'll call you The People.

Your nanny, who looks after you and your baby brother, we'll consider her to be the Worker.

And your baby brother, we'll call him the Future.

Now, think about that and see if that makes sense."

So the little boy goes off to bed thinking about what Dad had said.

Later that night, he hears his baby brother crying, so he gets up to check on him.

He finds that the baby has severely soiled his nappy so the little boy goes to his parents' room and finds his mother sound asleep.

Not wanting to wake her, he goes to the nanny's room. Finding the door locked, he peeks in the keyhole and sees his father in bed with the nanny.

He gives up and goes back to bed.

The next morning, the little boy says to his father, "Dad, I think I understand the concept of capitalism now."

The father says, "Good son, tell me in your own words what you think capitalism is all about."

The little boy replies, "Well, while the Capitalists are screwing the Workers, the Government is sound asleep, the People are being ignored and the Future is in deep shit."

ON WHICH NOTE, LET’S TALK ABOUT THE FUTURE.

In the future, banking, government, society and the world will be different.

It already is, as illustrated by the fact that SEVEN BILLION PEOPLE in this world now have access to wireless infrastructures through mobile devices.

The world is now connected P2P and C2C.

Forget B2B and B2C … today’s world is all about ‘me’ to ‘you’.

And what that means is that every single one of the seven billion people can be a communicator, developer, producer and entrepreneur.

So here’s to a planet where wealth generation through wireless technologies gives everyone the opportunity to be a millionaire.

But if you are to compete in that future planet, you need to think long as that gives you the ability to compete as illustrated by these wise words from Jeff Bezos, CEO of Amazon:

"If everything you do needs to work on a three-year time horizon, then you’re competing against a lot of people. But if you’re willing to invest on a seven-year time horizon, you’re now competing against a fraction of those people, because very few companies are willing to do that. Just by lengthening the time horizon, you can engage in endeavours that you could never otherwise pursue."

THERE’S THE KEY: THINKING LONG AND HAVING A VISION.

And how do you get that.

Well, there’s two ways to think about it.

First, think about it like a Chief Financial Officer (CFO).

And a CFO I knew once met the Devil.

The Devil said to the CFO: "I can make you richer, more successful and more famous than any other CFO alive. In fact, I can make you the greatest CFO that ever walked the planet."

"Great" says the CFO, "What do I have to do in return?"

The Devil smiles, "Well, of course you have to give me your soul," he says, "but you also have to give me the souls of your children, the souls of your children's children and, just for good measure, you have to give me the souls of all your descendants throughout eternity."

"Hmmmm," says the CFO, cautiously considering …  "and what's the catch?"

Or you can think of it like the late, great Steve Jobs.

Steve Jobs has many quotable quotes, but I think this one sums up thinking strategically: “"Being the richest man in the cemetery doesn't matter to me … Going to bed at night saying we've done something wonderful … that's what matters." 

So go do something wonderful and build something for the next millennia rather than the next minute.

Thank you.

 

Postscript

I’ve blogged a lot about the Long Now and Long Finance in the past.  If you want more of this, just go visit The Long Blog about the Long Now for a full summary.

Also note that the sections of this speech about the brain is extracted from the speech of Andrew Haldane I summarised earlier this week.  Not surprising as he was talking Long versus Short.  A coincidence, as my theme was given to me by the Worshipful Company several months ago, but good timing nonetheless.

 

 

About Chris M Skinner

Chris M Skinner
Chris Skinner is best known as an independent commentator on the financial markets through his blog, the Finanser.com, as author of the bestselling book Digital Bank, and Chair of the European networking forum the Financial Services Club. He has been voted one of the most influential people in banking by The Financial Brand (as well as one of the best blogs), a FinTech Titan (Next Bank), one of the Fintech Leaders you need to follow (City AM, Deluxe and Jax Finance), as well as one of the Top 40 most influential people in financial technology by the Wall Street Journal’s Financial News. To learn more click here...

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3 comments

  1. Very well written as always, but some concepts are confused. Greed is simply the desire to have more. Is it moral or not, don’t know, but it is in our nature (and animal’s too). But what humans have invented and achieved, are rules that limit this behaviour of wanting more. Some means are considered acceptable (legal), some not. We also invented “solidarity” and “wealth re-distribution”. So this is the crucial point: how do we re-distribute wealth. The other issue that is forgotten here is impact of short term behaviour on long-term. Short-termism can endanger, jeopardize, annihilate long-term objectives. If I empty the oceans until the last fish to make quick bucks, this will starve to death entire populations. If I cut the Amazonian forest to plant soja and feed the cattle, I endanger the whole ecological equilibrium of the Earth and ultimately of mankind. Global warming is another example of course

  2. Although though provoking, I feel the presentation confuses short term thinking with short selling.
    Further, not all short selling is about speculation (and don’t forget if the price of the shorted stock rises, the speculator is faced with an unlimited loss)
    The vast majority of selling short takes place through the repo markets or through the use of derivatives (both can have the same effect). The evolution of these markets has reduced spreads and increased liquidity. Liquidity is one of the keys to facilitating issuance, and hence getting finance for governments, supranational agencies and corporates – nothing short term about that, but enabled by those very transactions the speaker implies are evil.
    PS
    1 Note that when at one stage restrictions were placed by the government on short selling they didn’t ban this in market makers (the activities the speaker describes) because they knew it would jam the markets.
    2 We tend to think of markets in London as being the ‘London Stock Exchange’ but in volume terms this is very small – they don’t even trade the majority of shares now. No, the capital markets which dominate London markets (and where the government gets the tax from) are FX and other ‘over the counter securities markets’ which simply would NOT WORK without the ability to short sell.

  3. Tim
    I think you have assumed that my assertion is that all short selling is evil. That’s not what I’m saying. But if short selling is used to drive value away from an asset for short-term gain, which is part of some players’ game, then that is bad. Plus short selling is only referenced in the opening and is nit the thrust of the speech, which is about short term thinking.
    So you’re right – lets not confuse the issues raised here.
    Chris

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