What if there is a stock exchange meant only for long term investments, where strategic positioning is more valued than quarterly results, where there is low volatility but enough liquidity, where you buy stocks not following trends, rather companies whose vision you believe in.
Long Term Stock Exchange (LTSE), one of its kind that got approval from SEC (Securities Exchange Commission) on May 10, 2019 as a national securities exchange. Starting operations from September 9 this year, it has uniquely positioned itself to reform capitalism for the whole world. Long Term Stock Exchange is the brainchild of Eric Ries and his book The Lean Startup, 2011. The whole idea for a new stock exchange comes down to "create value over time".
What led to creating a new Exchange?
Let's get a brief take on how stock markets have changed their purpose with passing time. Exchanges, which were once established as a place where the savers can pass on their money to the businesses which can utilise it to increase productivity, has lost their significance in the modern world. Once meant as non-profit entities, today stock exchanges are for profit, and they generate revenue using trading volumes. This can simply be put as, the more volatility in the markets, the more money is in stock exchanges pocket. But it simply doesn't end here. Today, the average holding period of an active public equity trading shop is 10 minutes. And hence the volatility in the markets. In this whole process, as trade duration becomes shorter, the vision behind setting up of stock exchanges is diminishing. A stock exchange is meant to allocate capital efficiently, but in recent times, it has clearly failed its purpose.
Another fact that is crucial here is that there has been a 50% decline in the number of companies listed on stock exchanges in the past 20 years (considering the figures globally). This points out that new startups and businesses do not want to list on stock exchanges and rather turn to Venture Capitalists and Private Equity firms. But what is the reason for the same? The volatility and regulatory requirements of the stock exchanges. The quarterly reporting requirements, by the stock exchanges and regulatory authorities, have their own drawbacks. To paint a rainbow for the investors in the quarterly results, the companies almost deviates entirely from its long term strategy. They get into dealings which paint a beautiful balance sheet for them at the end of the month, to keep the market price of the stocks running. In this whole process, the company loses its sight, deviates from why it was formed at the very first place and are burdened every 3 months under the deadline. Also, this system has been criticized widely, in recent years.
As the Oracle of Omaha, Warren Buffet puts it,
"Clear communication of a company’s strategic goals-along with metrics that can be evaluated over time-will always be critical to shareholders. But this information… should be provided on a time deemed appropriate for the needs of each specific company and its investors, whether annual or otherwise.”
He has said that it promotes an unhealthy focus on short-term profits at the expense of long term performance.
And with the COVID background, it has been criticized more than ever before. With the pandemic hit, where should the company place its focus? Making the operations resilient and supply chain strong enough to face any such future adversaries or play for the short term and manage somehow to cook the books? Also, there are companies which cannot produce short term results, whose projects aim at long term horizons. There are companies working heavily in R&D with the environment, which cannot produce any results in short term but their strategies are so strong that if nurtured over the long term, can yield great results.
What is this new Stock Exchange about?
So what happens if there are less companies listed or the opportunities to invest decrease? Stock markets are there to allocate capital efficiently, playing a vital role in the economic system. But with the aforesaid developments and the volatility in stock markets, we can say that fair capitalism is declining. Now the startups have to look towards only VCs or private investment funds for capital, which works good for them but at the same time, creates their own hurdles. Also, not every saver has access to equity funds to put their money in and hence there is a rise in passive investing, which implies people no longer believe in growth stories of companies. Rather they buy the whole of the index and wait for the already overvalued indices to grow.
And hence LTSE, a stock exchange with a sole focus on the long term growth story of a company. So how will it work?
Long Term Stock exchange will be "Principle based, and not rule based". For a company to be listed in the LTSE, it has to adhere to the five principles:
Serving the interests of a broad group of stakeholders,
Measuring success over long time horizons that stretch from years to decades,
Implementing compensation plans for executives and directors that reward long term performance,
Giving directors a crucial role in the setting of strategy;
Monitoring of progress, and engaging with long term shareholders.
Each one of these principles plays a crucial part for the company, as put forth by Eric Ries. And since the inflection point is Corporate Governance, companies with strong ESG policies will form a strong base for such an exchange.
Does India need such an Exchange?
To end such an intriguing topic, think about this. If only Indian startup wonders such as Flipkart (which is now owned by Walmart) and PayTM (owned by Foreign Investors) got an early opportunity to raise money through Indian Stock markets, the founders who were bought out by these giants may still have retained their ownership status. And hence such a stock exchange, which inherits a true sense of capitalism is required for the future start-up environment.
Think about all the money that would have been retained and investments doubled. It is a win-win deal for both investors and startups. Do you think this is going to be a break through idea or just one of the exchanges in the list?
Do leave your comments below.