"What's Wrong With Wall Street?" Short-Term Gain and the Absentee Shareholder.

AuthorRothchild, John

Arbitrageurs Anonymous

Warren Buffett's famous proposal, in case you missed it, is that the government slap a 100 percent tax on all capital gains from stocks, options, or futures that the seller has owned for less than one year. This is a sin tax, not intended to raise a single penny in revenue. The idea is to discourage a socially destructive addiction: the Wall Street Trading Habit.

We've tried sin taxes on cigarettes and liquor and neither has stopped people from smoking and drinking, but taxing profits 100 percent is almost guaranteed to stop people from short-term trading. Short-term investors--which according to published reports is nine investors out of ten these days--admittedly are a gung-ho lot, but it's hard to imagine any who are gung-ho enough to continue buying and selling pro bono.

Buffett's turnover tax has gotten a wider and more enthusiastic audience than it might have were it you or me or even David Stockman proposing it. Investors of all shapes and sizes listen to Buffett not simply because his words have made them wiser but because his actions to date have made so many so much richer. Had you invested just $2,000 in Mr. Buffett's company, Berkshire Hathaway (BKHT), back in the early 1960s you would have made 571 times your money by now. The original $2,000 would be worth $1.142 million. (On the other hand, Mr. Buffett himself once invested $58,000 in The Washington Monthly, proving that he's not infallible.)

If you're not already convinced that short-term trading is either (a) destructive, or (b) worth stopping, you will be after you read Louis Lowenstein's book(*). The jacket blurb identifies him as a finance professor and former merger and acquisitions lawyer, but obviously he doesn't want to be remembered that way any more than Paul wanted to be remembered as a fisherman. He's the first convert to Buffett's cause to break ranks with the trading establishment and to write down a chunk of startling gospel. (Actually, Lowenstein has his own cause, shreholder democracy, but he's much less persuasive about that than he is about the evils of short-term trading.)

The trading habit has become more compulsive since the 1960s, when the annual turnover rate for stocks was 12 percent. Now it's 87 percent. In the late 1950s on a busy day in the New York Stock Exchange, three million shares changed hands. Today, three million shares are traded every ten minutes.

We're rapidly approaching 100 percent turnover, when every share in the country, on average, will be traded once a year, and some obviously will change hands much more often. That's $3 trillion worth of stocks shunted from one portfolio to another, with the result, as Lowenstein points out, that "at the end of the year, the institutions as a group own roughly the same stocks they did in the beginning." It's gotten to the point that a ten-year Treasury bond normally is owned for only 20 days!

It's not mom and pop doing all this trading. It's the prudent portfolio managers they "hired" to run the mutual funds plus the...

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