People don’t invest for the long term anymore. The average holding period for a share in a portfolio has fallen from eight years in the mid-twentieth century to barely six months today. This is partly down to the exponential improvement in technology. Buying shares used to be an ordeal, but now all it takes is a click. Execution is instant and it’s almost free. It isn’t just access that has been democratised, but information too. In fact, the problem today is the opposite: there’s an overabundance of information, and it’s often mistaken for baseless opinion. What’s more, artificial intelligence is making investing an even more down-to-earth, approachable endeavour. AI can be a wonderful companion, one you can ask about concepts that might otherwise feel out of reach, and turn to for advice on the best way to proceed. Today, what sets a professional investor apart from an amateur one is, above all, experience (having weathered all manner of circumstances certainly helps, and recent decades have offered a rich array on that count) and the time devoted to it. The assumption is that everyone already has a job to do, and not everyone can (or wants to) spend their free time taking financial decisions.
A growing number, however, do want to. Making money without leaving the sofa sounds (too?) good to many. The weight of retail (for those less familiar with the term, this is what non-institutional investors are called) has been growing at an overwhelming rate. And with it have come phenomena that rather unsettle those of us who have worked in financial markets for many years now. Leveraged single-stock ETFs (South Korea’s regulator apologised for having allowed them), meme stocks (declining, if not bankrupt, companies that surge in value by going viral on social media), or 0DTE (zero days to expiration) options are just some examples — and they are far from isolated cases. The latter, in which the premium paid is lost within less than 24 hours, now account for more than half of all options traded on the S&P 500 (and in turn, half of these are executed by private individuals). Strictly speaking, that’s gambling, not investing. Although for some, it amounts to the same thing. A recent study found that younger people regard gambling as a valid method for building wealth. There’s no doubt that investing is being “gamified”. Soon it will be done from the PlayStation.
This focus on the short term isn’t just confined to a handful of traders. Most decisions are no longer even made by humans: they are the product of algorithms operating in milliseconds. “High-frequency trading”, as it’s known, is estimated to account for between 60 and 70% of daily trades. The institutional investor carries less weight by the day — and thinks less, too. ETFs, which mostly track indices, represent more than half of all assets under management. That forces traditional fund managers to try to get it right, very quickly, as underperformance is punished with redemptions. The momentum factor (for the uninitiated, this is as simple as buying whatever is rising the most) dominates over the rest. Racking one’s brains is a futile exercise that can cost managers their job. This drives managers either to replicate the indices against which they’re measured (the real rates of indexation are much higher than the ETF-to-total ratio alone would suggest) or to enormous portfolio turnover (on average, they change their holdings entirely within a year and a half). Nor do the chief executives of listed companies have the luxury of planning years ahead (at large American companies, average tenure in 2000 was 10 years; now it’s half that). There’s no room for patience — not for anyone. And AI will only heighten this short-termism, since it will speed up both analysis and decision-making.
This is precisely where the opportunity lies. Everyone is caught up in the same battle, pouring vast resources into maximising immediate results. Taking part doesn’t seem sensible: it guarantees mediocre results, at best. At worst, following the crowd can even be dangerous. This is especially true when much of the recent surge is tied to data centre construction, which may not be as profitable as current calculations suggest, and which shows several of the warning signs typical of a bubble.
Let me also remind you, while we’re at it, that most funds track indices, and that these are almost all at record highs. In part, this is yet another example of the growing influence retail investors have over financial markets. They used to be the first to sell when things got difficult; now they’re the first to buy. They seem to have internalised the idea that, whatever happens, central banks and/or governments will step in and share prices will bounce back. Many investors, in fact, have never known anything else. Consider that since the Great Recession in 2009, we’ve lived through doubts over the euro’s survival, Brexit, two Trumps, a pandemic, the sharpest rise in inflation since the 1970s, the biggest bank failures in history (three of the four largest happened in 2023!), tariff wars, real wars (including a Russian invasion of a European country), chaos in the Middle East. And the list goes on. The one time things looked truly bleak, in 2022, ChatGPT arrived to rescue collective enthusiasm — and we’re still riding that wave. The result is that stock market corrections keep getting smaller, in frequency, duration and intensity, which creates a false sense of security. Authorities no longer even need to intervene in the face of adverse events; markets “bounce back on their own”. To the point where these authorities can even trigger the “events” themselves and come away unscathed. Liberation Day or the launch of a war with Iran (which still shows no sign of resolution six months on) have both been accompanied by stock market records. As George Soros’s theory of reflexivity explains, investors’ perceptions and financial asset prices influence one another, in a continuous feedback loop. For now, that loop is running upward. But don’t forget it works the other way too.
The good news is that no one is looking to the long term. Not only that, but anyone who dares fall short of expectations by so much as a millimetre is punished with brutal share-price falls. In theory, the value of a company is the sum of the cash flows it will generate in future, discounted to present value. What happens in any given quarter ought to be completely irrelevant. Then there are businesses priced as though they’re about to vanish, supplanted by superintelligent digital beings that, on top of doing our ironing and our shopping for us, will take over every piece of software that exists, and will work as consultants, lawyers, and successful hip-hop artists. It’s not clear whether the rest of us will all be out of work, or at home by the pool watching the Roland Garros final on TV between two robots — for a little while, at least, since a single tennis match would take three or four months. The patient investor with even a modicum of judgement has rarely had so many — or such good — opportunities available, ones that should also feel less dizzying if things take a turn for the worse. The trick is to choose well and stop fixating on the short term. Who has the time?
Article published in El faro del inversor, in Cinco Días (21.09.206)