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The Long-Term Stock Exchange Is Worth a Shot

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Re: The Long-Term Stock Exchange Is Worth a Shot

#51

Post by jmh530 »

amelius wrote: post #24
timthelion wrote: post #16

This article misses the reason why short term investors are potentially harmfull. The author writes: "One basic and important implication of this theory is that, if you hold a share of stock for a minute, you will want the company to increase its long-term earnings power during that minute. If, during your minute of ownership, the company announces "we have sold all our factories and ruined our productive capacity, b…

Yes. The original premise of the article is: > The value of a share of a company is equal to the market's expectation of the present value of its future free cash flows. Emphasis on "expectation". It may change wildly in the short term; reasons include hype, speculation, and news that has only short term relevance.

I think you're right that we don't really understand yet the implications of this idea. For instance, it's not just expectation that should be emphasized, it's the discount rate at which the present value is performed. Conditional on the expected value of the earnings over the future, one can calculate the implied discount rate given a company's price (equity risk premium). When this value is higher, the market is effectively more present-oriented, they care less about future cash flows. And vice-versa. Would the equity risk premium fall under this type of market? Would that mean lower equity prices? I don't know.

Re: The Long-Term Stock Exchange Is Worth a Shot

#53

Post by sseveran »

danmaz74 wrote: post #29
grondilu wrote: post #22

> Anyway here's a story about the Long-Term Stock Exchange, which is a new planned stock exchange backed by Silicon Valley venture capitalist types that will have "tenure voting," in which shareholders who hold their shares for a long time will get more votes. This has been discussed already on HN, and I believe it's a bad idea. All that would do would be to create two kinds of shares : the normal ones and those with…

If I got this correctly, when you sell your shares with high voting power, they lose their high voting power.

We can get around this easily enough with a Total Return Swap. This way we can move the economic interest around with out ever moving the shares.

Re: The Long-Term Stock Exchange Is Worth a Shot

#54

Post by stale2002 »

cujic9 wrote: post #26
stale2002 wrote: post #19

Earlier quoted context omitted.

Sure, but the price of the stock probably reflects that voting power. For example, right now there are different share types that you can buy from the same company that have different voting rights.

Yes, but... the article suggests that in the long-term exchange, the voting power resets with a change in ownership. So while a share that has accumulated a lot of voting power is valuable to me, you wouldn't necessarily pay any more for it, since the power doesn't transfer to you.

Well, but the original owner loses the power. So if you want to convince an owner to throw away their voting power, you'd have to pay them a higher price.

Re: The Long-Term Stock Exchange Is Worth a Shot

#55

Post by notahacker »

grandalf wrote: post #20

There is a pervasive idea that longer term investments are somehow better (morally superior, more socially responsible) than short-term. This stems from the ancient prejudice toward financiers (usually jews) and the corresponding ancient prejudice against speculation. Let me debunk it: - Suppose an 18 year old and a 80 year old each buy a share of company XYZ's stock. Whatever their goals might otherwise be, the 80 y…

Isn't the particular problem this is aiming to solve less that the founder CEOs aren't able to think in 30 year time horizons but more that sometimes they are[1], but fear that when most market participants have much higher discount rates, their position is vulnerable to activist takeovers (if the market's preferred yields are sufficiently short term, they'll get a value boost for kicking out the execs who's hockey stick growth is forecast for ten years' time in favour of those promising earlier revenue growth). It's not the market makers they're worried about, it's the people that actually hold stock for long enough to vote, hence the desire to weight the voters in favour of themselves and the investors that bought into their vision, and not the people buying with the intention of flipping after good quarterly figures.

I mean, they're certainly not going to raise bigger IPOs on a brand new marginal exchange with no track record and a lack of liquidity, but I'm not sure that's the real aim here. (You might need a new exchange to introduce rules like making key executives immune to termination too)

That said, I'm not sure how real a problem it is: AMZN has a very long term strategy and unusual approach towards margins and its stock is doing just fine. And cynics might suggest that other tech stocks returning unimpressive quarterly figures might actually not have thirty year plans...

[1]or want to be considered that way to justify still not turning any profits as their growth metrics start to plateau

Re: The Long-Term Stock Exchange Is Worth a Shot

#56

Post by JumpCrisscross »

cujic9 wrote: post #2

Interesting idea, but seems impractical because it causes very weird incentives: * Can a company exist in both the "normal" exchange and the "long term" exchange at the same time? If so, can I short on the normal exchange and buy on the long term exchange for some free voting power that increases over time? * Many (most?) consumer-facing brokerages make a significant portion of their revenue by lending out their cust…

> Can a company exist in both the "normal" exchange and the "long term" exchange at the same time?

Strictly speaking, nobody needs an exchange to implement a corporate voting regime where one's vote per share increases as a function of holding time. You just amend your certificate of incorporation and/or bylaws and, assuming the state in which you're incorporate allows it, it happens.

The trouble is most stock exchanges have rules about voting rights. If you aren't compliant, you can't list with them. A big-ticket IPO, e.g. Uber, Airbnb or Saudi Aramco, might be able to convince an exchange to change its rules. This is an exchange pre-empting that negotiation.

If a quality company listed with these voting rights, there would be nowhere you could buy its shares where voting rights would be different because they'd all trace to the same corporate charter. There might just, at least for some time, fewer places where one could buy them.

(Stock lending would have to be dealt with. It doesn't strike me as a particularly challenging issue to solve, and not everyone has to solve it the same way. The bigger issue is where to sever legal and beneficial ownership. If I have a bunch of LLCs who have held a company's stock since IPO, it might make more sense to sell the LLCs with their voting rights intact than sell out of them. This torpedoes most of the benefits of public over private markets.)

Re: The Long-Term Stock Exchange Is Worth a Shot

#57

Post by notahacker »

ThrustVectoring wrote: post #49
notahacker wrote: post #42

Earlier quoted context omitted.

Perhaps you'd tie voting rights to a named human beneficial owner, so the prospective purchaser of your shell corporation wouldn't inherit them[1] Though it might have the interesting side effect of fund managers who exercise their voting rights being better compensated and staying in their jobs longer... [1]possible to devise some kind of unusual contractual arrangement where the "beneficial owner" retained formal t…

You can't ban separating out economic interest and formal title to the shares without banning options, forward contracts, and other derivatives on the stock. Like, these are not unusual contractual arrangements. These are standardized and sold on the market. Put options transfer the downside risk to the writer, call options transfer the upside risk to the buyer, futures contracts essentially do both.

My point was you'd ban titleholders from selling a contract directing them to exercise their votes as a delegate of the purchaser, not the more general separation of title and economic interest which is obviously valuable for a large number of reasons.

(I mean, it's still a bit messy because fund managers have a fidicuary duty to exercise their voting rights on behalf of their own shareholders, but I don't have the ability to dictate a new aggressively activist investor policy to Vanguard)

Re: The Long-Term Stock Exchange Is Worth a Shot

#58

Post by dmurray »

cujic9 wrote: post #11
adventured wrote: post #9

Earlier quoted context omitted.

> can I short on the normal exchange and buy on the long term exchange for some free voting power that increases over time? Buying voting power on the long-term exchange isn't free, your capital is allocated. You have finite capital. Your cost for each unit of voting power declines perpetually so long as you hold it, it never goes to zero (free). You can view the shorting as paying for your purchase in the long-term…

Contrived? Yes. Meaningless? No. Voting rights are powerful. That's the point of the long-term exchange. In existing exchanges, going long and short in equal amounts on the same stock simply cancel each other out. But in a "long-term exchange", taking this same position (or lack thereof) gives me a valuable asset: voting power that grows over time.

> Voting rights are powerful. That's the point of the long-term exchange.

> In existing exchanges, going long and short in equal amounts on the same stock simply cancel each other out.

Not really, for voting purposes. You can buy the stock, borrow the stock, sell the borrowed shares and end up with "free" voting rights and no economic exposure to the stock. I say "free" because you may have to pay someone a few percent to lend you the stock.

You might say centralised clearing prevents this from happening - that my account will always just show a position of zero shares so I have no votes. But even in that case, I can open two accounts, one long and one short, with the same effect.

Re: The Long-Term Stock Exchange Is Worth a Shot

#59

Post by taurath »

JumpCrisscross wrote: post #56
cujic9 wrote: post #2

Interesting idea, but seems impractical because it causes very weird incentives: * Can a company exist in both the "normal" exchange and the "long term" exchange at the same time? If so, can I short on the normal exchange and buy on the long term exchange for some free voting power that increases over time? * Many (most?) consumer-facing brokerages make a significant portion of their revenue by lending out their cust…

> Can a company exist in both the "normal" exchange and the "long term" exchange at the same time? Strictly speaking, nobody needs an exchange to implement a corporate voting regime where one's vote per share increases as a function of holding time. You just amend your certificate of incorporation and/or bylaws and, assuming the state in which you're incorporate allows it, it happens. The trouble is most stock exchan…

That all but guarantees a lower stock price over time for the company, as newer shares are literally less valuable than older shares. If you have “high priority” voting shares worth $100, they could be worth $90 or less to the investor that is buying them because they decrease in value on every trade.

Re: The Long-Term Stock Exchange Is Worth a Shot

#60

Post by chirau »

jmh530 wrote: post #47
joshu wrote: post #41

My gut sense is that the important time period is length of hold going forward, not length of past hold. Maybe the vote strength should instead go with the period of lockup instead? That is, I agree to hold my shares for ten years, so I get ten votes. Perhaps it could even be slightly nonlinear with respect to the length of time? (years * 1+log(years)) or similar? Edit: LTSE reminds me of LTCM. Not a great connotatio…

There is some research in political science on paying for votes in elections. They came to the conclusion that you should pay $x and receive sqrt(x) votes. 100 dollars -> 10 votes. I would think the same reasoning would work here. Hold stock $x days, receive sqrt(x) votes (years is tricky because you can hold less than 1 year and the value increases quite a bit during that period).

Would such a political system not spiral into chaos really rapidly?
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