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We need investment to return to its ‘patient evolutionary path’

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Capitalist lore states that shareholders have more concern for the long-term interests of companies they invest in than managers do. The increase in high frequency trading (HFT), following big bang and advances in computing, has disconnected investment from its core purpose. Businesses need capital and in return deliver income and asset growth for investors.

Dictionaries describe investment as, “The action or process of investing money for profit or material result”, and, “A thing that is worth buying because it may be profitable or useful in the future.”

Speculation is more complicated to define because some sources say that speculation is simply a higher risk form of investment. Others define speculation more narrowly as positions not characterised as hedging – an investment position that offsets potential loss. Others define speculation as a damaging form of investment that disconnects investors from the companies invested in.

The whole spectrum clearly exists, from the person investing for the future in a company they understand and find attractive as a proposition. At the other end, you have the investor who hands their money over to a computer algorithm and trades purely for short-term gains. The former is the original purpose of investment; the latter more akin to a casino.

“When we own portions of outstanding businesses with outstanding managements, our favourite holding period is forever”, wrote Warren Buffett to Berkshire Hathaway shareholders in 1988. Based on global stock turnover ratio, most listed businesses fall far short of being outstanding or run by outstanding management.

Stocks held for less than four months in UK and USA

The World Bank defines the stock turnover ratio as, “The total value of shares traded during the period divided by the average market capitalization for the period. Average market capitalisation is calculated as the average of the end-of-period values for the current period and the previous period.”

If a company was worth £100 and the total value of shares traded in that company was £100, then the stock turnover ratio was £100%. This means the total value of the shares traded equals the value (market capitalisation) of the company.

Stock turnover ratio.

The pre-crash peaks of 270% turnover in 2007 in the UK and 404% in 2008 in the USA, meant stocks were being held for just over four months and under three months respectively. As this was an average, some stocks were changing hands even faster. That hardly represents the long-term interest in a company’s future.

Andrew G Haldane of the Bank of England covered this in an excellent paper called Patience and Finance in September 2010. He illustrated the trend graphically.

David Hunkar of Seeking Alpha wrote shortly afterwards, “Based on the NYSE index data, the mean duration of holding period by US investors was around seven years in 1940. This stayed the same for the next 35 years. The average holding period had fallen to under two years by the time of the 1987 crash. By the turn of the century, it had fallen to below one year.  It was around seven months by 2007.

“Similar pattern exists in the UK also as shown in the chart above. There the average duration has fallen from around five years in the mid-1960s to less than 7.5 months in 2007.

“Over the past 15 years even in international equity markets, holding periods have fallen. The Chinese market was red hot until few months ago. However the duration for the Shanghai stock market index is close to just six months. This shows that Chinese investors do not have a long-term horizon.”

The Bank of England’s Haldane went on to add the following: “A decade ago, the execution interval for HFTs was seconds. Advances in technology mean today’s HFTs operate in milli- or micro-seconds. Tomorrow’s may operate in nano-seconds.

“HFTs operate in size as well at speed. HFT firms are believed to account for more than 70% of all trading volume in US equities, 40% of volumes in US futures and 40% of volumes in US options. In Europe, HFTs account for around 30-40% of volumes in equities and futures. These fractions have risen from single figures as recently as a few years ago. And they look set to continue to rise.

“Asian is not immune from these trends. HFT is believed to account for between 5-10% of Asian equity volumes. In China, HFT is still in its infancy. But market contacts suggest as much as 80-90% of trading on the Shanghai stock exchange may be done by day-traders, many small retail investors. Impatience is socially, as well as technologically, contagious.

“This evolution of trading appears already to have had an effect on financial market dynamics. On 6 May 2010, the price of more than 200 securities fell by over 50% between 2.00pm and 2.45pm. At 2.47pm, Accenture shares traded for around seven seconds at a price of 1 cent, a loss of market value close to 100%. No significant economic or political news was released during this period.”

The World Bank also measures the total value of stocks traded as a percentage of GDP. Again, if global or a country’s GDP was £100, if the ratio was 100%, then the total value of stocks traded would be £100. In the UK, the value of stocks traded reached 365% of GDP in 2007 in the UK and 450% in 2008 in the USA.

Total value of stocks traded as a percentage of GDP.

The World Bank also compares the market capitalisation of listed companies as a percentage of GDP.  Again, if global or a country’s GDP was £100 then the total value of its listed companies would be £100, if the ratio was 100%.

Despite the speed of trades and growth in the value of trades, the actual market capitalisation of listed companies has been less extreme or volatile – apart from the dotcom boom and 2008 crash. While there will be some debate about whether this is a lost or underperforming decade, listed companies as a percentage of GDP market capitalisation of listed companies in 2011 remains at the same level as 1995.

Market capitalisation of listed companies as a percentage of GDP.

In conclusion, Andrew Haldane stated, “Just as patience can ward off great disaster, impatience can ruin a whole life. Generations of dieters and addicts are testament to that. So too is finance, not least in the light of the crisis. It is important finance sticks to the patient evolutionary path. To do so, the fidgeting fingers of the invisible hand may need a steadying arm.”

Further reading:

Transparency, simplicity and honesty is urgently needed in investment

Investors call for complete transparency over fees and charges

Financial advice industry ‘a long way from making things better’, as banks unveil charges

Ethical funds ‘exposed’ or the lesser of 3,000 evils?

Ex-Goldman Sachs director: unethical banking affects everyone

Simon Leadbetter is the founder and publisher of Blue & Green Tomorrow. He has held senior roles at Northcliffe, The Daily Telegraph, Santander, Barclaycard, AXA, Prudential and Fidelity. In 2004, he founded a marketing agency that worked amongst others with The Guardian, Vodafone, E.On and Liverpool Victoria. He sold this agency in 2006 and as Chief Marketing Officer for two VC-backed start-ups launched the online platform Cleantech Intelligence (which underpinned the The Guardian’s Cleantech 100) and StrategyEye Cleantech. Most recently, he was Marketing Director of Emap, the UK’s largest B2B publisher, and the founder of Blue & Green Communications Limited.

Economy

How Going Green Can Save A Company Money

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going green can save company money
Shutterstock Licensed Photot - By GOLFX

What is going green?

Going green means to live life in a way that is environmentally friendly for an entire population. It is the conservation of energy, water, and air. Going green means using products and resources that will not contaminate or pollute the air. It means being educated and well informed about the surroundings, and how to best protect them. It means recycling products that may not be biodegradable. Companies, as well as people, that adhere to going green can help to ensure a safer life for humanity.

The first step in going green

There are actually no step by step instructions for going green. The only requirement needed is making the decision to become environmentally conscious. It takes a caring attitude, and a willingness to make the change. It has been found that companies have improved their profit margins by going green. They have saved money on many of the frivolous things they they thought were a necessity. Besides saving money, companies are operating more efficiently than before going green. Companies have become aware of their ecological responsibility by pursuing the knowledge needed to make decisions that would change lifestyles and help sustain the earth’s natural resources for present and future generations.

Making needed changes within the company

After making the decision to go green, there are several things that can be changed in the workplace. A good place to start would be conserving energy used by electrical appliances. First, turning off the computer will save over the long run. Just letting it sleep still uses energy overnight. Turn off all other appliances like coffee maker, or anything that plugs in. Pull the socket from the outlet to stop unnecessary energy loss. Appliances continue to use electricity although they are switched off, and not unplugged. Get in the habit of turning off the lights whenever you leave a room. Change to fluorescent light bulbs, and lighting throughout the building. Have any leaks sealed on the premises to avoid the escape of heat or air.

Reducing the common paper waste

paper waste

Shutterstock Licensed Photo – By Yury Zap

Modern technologies and state of the art equipment, and tools have almost eliminated the use of paper in the office. Instead of sending out newsletters, brochures, written memos and reminders, you can now do all of these and more by technology while saving on the use of paper. Send out digital documents and emails to communicate with staff and other employees. By using this virtual bookkeeping technique, you will save a bundle on paper. When it is necessary to use paper for printing purposes or other services, choose the already recycled paper. It is smartly labeled and easy to find in any office supply store. It is called the Post Consumer Waste paper, or PCW paper. This will show that your company is dedicated to the preservation of natural resources. By using PCW paper, everyone helps to save the trees which provides and emits many important nutrients into the atmosphere.

Make money by spreading the word

Companies realize that consumers like to buy, or invest in whatever the latest trend may be. They also cater to companies that are doing great things for the quality of life of all people. People want to know that the companies that they cater to are doing their part for the environment and ecology. By going green, you can tell consumers of your experiences with helping them and communities be eco-friendly. This is a sound public relations technique to bring revenue to your brand. Boost the impact that your company makes on the environment. Go green, save and make money while essentially preserving what is normally taken for granted. The benefits of having a green company are enormous for consumers as well as the companies that engage in the process.

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Energy

5 Easy Things You Can Do to Make Your Home More Sustainable

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sustainable homes
Shutterstock Licensed Photot - By Diyana Dimitrova

Increasing your home’s energy efficiency is one of the smartest moves you can make as a homeowner. It will lower your bills, increase the resale value of your property, and help minimize our planet’s fast-approaching climate crisis. While major home retrofits can seem daunting, there are plenty of quick and cost-effective ways to start reducing your carbon footprint today. Here are five easy projects to make your home more sustainable.

1. Weather stripping

If you’re looking to make your home more energy efficient, an energy audit is a highly recommended first step. This will reveal where your home is lacking in regards to sustainability suggests the best plan of attack.

Some form of weather stripping is nearly always advised because it is so easy and inexpensive yet can yield such transformative results. The audit will provide information about air leaks which you can couple with your own knowledge of your home’s ventilation needs to develop a strategic plan.

Make sure you choose the appropriate type of weather stripping for each location in your home. Areas that receive a lot of wear and tear, like popular doorways, are best served by slightly more expensive vinyl or metal options. Immobile cracks or infrequently opened windows can be treated with inexpensive foams or caulking. Depending on the age and quality of your home, the resulting energy savings can be as much as 20 percent.

2. Programmable thermostats

Programmable thermostats

Shutterstock Licensed Photo – By Olivier Le Moal

Programmable thermostats have tremendous potential to save money and minimize unnecessary energy usage. About 45 percent of a home’s energy is earmarked for heating and cooling needs with a large fraction of that wasted on unoccupied spaces. Programmable thermostats can automatically lower the heat overnight or shut off the air conditioning when you go to work.

Every degree Fahrenheit you lower the thermostat equates to 1 percent less energy use, which amounts to considerable savings over the course of a year. When used correctly, programmable thermostats reduce heating and cooling bills by 10 to 30 percent. Of course, the same result can be achieved by manually adjusting your thermostats to coincide with your activities, just make sure you remember to do it!

3. Low-flow water hardware

With the current focus on carbon emissions and climate change, we typically equate environmental stability to lower energy use, but fresh water shortage is an equal threat. Installing low-flow hardware for toilets and showers, particularly in drought prone areas, is an inexpensive and easy way to cut water consumption by 50 percent and save as much as $145 per year.

Older toilets use up to 6 gallons of water per flush, the equivalent of an astounding 20.1 gallons per person each day. This makes them the biggest consumer of indoor water. New low-flow toilets are standardized at 1.6 gallons per flush and can save more than 20,000 gallons a year in a 4-member household.

Similarly, low-flow shower heads can decrease water consumption by 40 percent or more while also lowering water heating bills and reducing CO2 emissions. Unlike early versions, new low-flow models are equipped with excellent pressure technology so your shower will be no less satisfying.

4. Energy efficient light bulbs

An average household dedicates about 5 percent of its energy use to lighting, but this value is dropping thanks to new lighting technology. Incandescent bulbs are quickly becoming a thing of the past. These inefficient light sources give off 90 percent of their energy as heat which is not only impractical from a lighting standpoint, but also raises energy bills even further during hot weather.

New LED and compact fluorescent options are far more efficient and longer lasting. Though the upfront costs are higher, the long term environmental and financial benefits are well worth it. Energy efficient light bulbs use as much as 80 percent less energy than traditional incandescent and last 3 to 25 times longer producing savings of about $6 per year per bulb.

5. Installing solar panels

Adding solar panels may not be the easiest, or least expensive, sustainability upgrade for your home, but it will certainly have the greatest impact on both your energy bills and your environmental footprint. Installing solar panels can run about $15,000 – $20,000 upfront, though a number of government incentives are bringing these numbers down. Alternatively, panels can also be leased for a much lower initial investment.

Once operational, a solar system saves about $600 per year over the course of its 25 to 30-year lifespan, and this figure will grow as energy prices rise. Solar installations require little to no maintenance and increase the value of your home.

From an environmental standpoint, the average five-kilowatt residential system can reduce household CO2 emissions by 15,000 pounds every year. Using your solar system to power an electric vehicle is the ultimate sustainable solution serving to reduce total CO2 emissions by as much as 70%!

These days, being environmentally responsible is the hallmark of a good global citizen and it need not require major sacrifices in regards to your lifestyle or your wallet. In fact, increasing your home’s sustainability is apt to make your residence more livable and save you money in the long run. The five projects listed here are just a few of the easy ways to reduce both your environmental footprint and your energy bills. So, give one or more of them a try; with a small budget and a little know-how, there is no reason you can’t start today.

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