Friday, February 12, 2021

Investing in the post-modern economic era

One of most interesting things to me about the stock market’s recent wild ride is that it isn’t actually anything new. Short-selling is part of the way our markets work, and in fact it’s an important mechanism for creating liquidity. To those in the financial world there’s nothing unusual about what happened to company stocks like GameStop and AMC. What has made the last two weeks different is that now, everyone is paying attention. And that’s because a lot of ordinary people, joining together on social media, have been thrust into the public eye. Suddenly, the general public is asking why this kind of trading activity isn’t illegal, and how platforms can be allowed to pause due to volatility. What’s been less covered is the resulting question for companies: how can they prevent themselves from becoming the next GameStop?

That was the focus of a conversation I had last week with Amy Butte, the former CFO of NYSE, and G100’s membership. And a lot of what it came down to was this: what is the purpose of a market?

Fundamentally, markets are meant to be a representation of company value. But in the last fifteen to twenty years, the balance has shifted away from value and towards volume. In other words, away from investing towards trading. What’s happening right now is what I have been calling post-modern economics: the markets reward trading that’s about itself, rather than the development of the companies it’s connected to.

Liquidity is a good thing, of course, but there’s an urgent need to reinvest—figuratively and literally—in R&D and value creation. We need to consider the consequences of continuing to allow events like the GameStop scenario to happen. Bubbles and mania aren’t new, but prior generations classified them as a bad occurrence. Now, when we see people making a lot of money without making actual things our impulse as a society is to cheer.

One of the best tools we have to help rebalance is a stock exchange. That’s because in addition to being platforms for trading, exchanges are avatars for corporate governance. In particular, they can call for governance that demands value creation over time rather than quick, ephemeral profit. One of the most effective ways they can achieve this is by asking companies to bring on more long-term investors, which will significantly reduce the kind of volatility we saw last week (my colleague Martin has written about this).

In order for this to work, public companies need one more thing: transparency around who holds their shares. When companies go from private to public they move from a group of deep relationships formed over time, to a much larger, more anonymous field. The result is that they have no way to know whether their investors are truly supporting the company’s efforts versus looking to get in and out when the timing is right. In addition to seeking more long-term investor alliances, governance can also direct how companies engage with those investors. In particular, companies can suggest that long-term investors register their shares so they can’t be lent out for short-selling, signalling that the company is committed to long-term value creation and identifying the investors who share that goal.

Another way governance can empower value creation is by aligning incentives with all stakeholders in a company’s ecosystem. Think about GameStop’s retail outlet employees during the company’s upheaval. Everything happening to the stock price was completely disconnected from their lived experience as people helping the company meet its goals. They had, in every sense, no stake in it. But what if they had access to shares through a company-created stock endowment (like the one Airbnb recently created for hosts)? The company’s success would be their success, and the resulting shared dedication to growth would help support an entire ecosystem.

I believe so firmly in the need for a shift towards long-term behaviors that I founded LTSE to do it. Recent events have only strengthened my conviction that we need to focus as much on value creation as we do on trading activity. If you’re interested in learning more about the ways we’re working to help realign the markets with true value, please visit us at

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