Investors are selling their future short

By Lisa Buckingham for the Daily Mail
Updated: 13:13 EDT, 28 May 2011

With the honourable exception of a few such as Warren Buffett, who regard the ideal time to sell a share as 'never', most investors are becoming increasingly short term.

We have seen such behaviour in takeovers where shareholders, even long funds, decide to lock in the profit from a bidder today rather than wait for the returns promised by management further down the line.

A recent paper, The Short Long, from Andrew Haldane and Richard Davies of the Bank of England, suggests there is something quite illogical going on here.

They have looked at hundreds of firms in Britain and America from 1980 to 2009 and have concluded that investors are excessively discounting expected future cash flows in determining today's share price. In fact, they suggest the cash flow discount is five to ten per cent more than would be rational.

So management trying to persuade shareholders to back a long-term project - building a railway, say - has to offer sparkling returns ten or 20 years out or investors will decamp. The research suggests investors will effectively discount 99% of cash flows within 25 years.

Worse, this trend, according to the study, is accelerating. Unless we are careful, the result will be that no infrastructure or manufacturing project will be financed by the private sector. Indeed, Haldane and Davies's research suggests that this shareholder 'myopia' might be a major factor behind the demise of manufacturing in this country.

They argue that greater transparency about long-term performance could reduce the effects of short-termism as could better governance.

But these are unlikely to rectify what, in Europe at least, is a British problem and which, if not corrected shortly, will lead to us falling further behind in terms of manufacturing and infrastructure competitiveness.

'Without intervention, the long could become shorter still,' say Haldane and Davies. Possibly it is time for Vince Cable, who has this issue on his agenda, to consider tax incentives for long term shareholders.

Lord Browne, the former boss of BP, is apparently making it known to friends that he no longer wants to return to mainstream business life as head of another FTSE 100 company.

How extraordinary that this man should have thought that only four years since being forced out of BP in disgrace and caught lying to the High Court, he should be welcomed back to the front line of British business.

In a botched announcement, Browne's name was recently linked to the chairmanship of controversial commodities giant, Glencore, only hours before Simon Murray was formally announced for the role.

Last week Browne appeared to pull up in the two-horse race with Sir Peter Gershon to replace Sir John Parker as chairman of National Grid.

Browne was credited with transforming BP. But don't forget there was a heavy price to pay for that transformation - not least the creation of a culture that spawned the Deepwater Horizon and Texan oil refinery disasters - both fatal and extraordinarily costly accidents.

For a company such as National Grid, whose engineering skill is preeminent and which is heading for some delicate negotiations in America over asset sales, a man who ran down BP's engineering base to a level where accidents - and in American waters - became inevitable, does not look an ideal candidate.

They are already beating each other up mercilessly on price. But in a stalling market they are shuffling deckchairs. Supermarkets want more shoppers, yes. But they want those shoppers to love them and stay loyal. That is how they will be able to sell addons such as credit cards, energy supplies and pet insurance.

Hence the provision of Facebook sites to share recipe ideas, internet deliveries and now savings bonds that offer shoppers a slightly more attractive rate of interest on their money with the incentive of gift vouchers to be spent at their special store.

John Lewis recently launched its bond, which was heavily oversubscribed, and now Sainsbury's is looking to do something similar. It is less messy and risky than encouraging shoppers to buy shares (which might go down as well as up) and it anchors customers who will spend more to keep their grocer of choice afloat - at least until the bond plus interest is repaid.