Triggered by a speech of the Dutch Minister of Finance, Mr. Wouter Bos, I felt the urge to react on his confronting message to investors.

Today Wouter confronted shareholders with the fact that they have done nothing to prevent the crisis.  He told the audience of investors that there is a big difference between short term gain and long term profit.

Well, there is a difference. Short term gain is much better than long term profit, because by now we know there will be no long term profit.

In the last two decades the speed of everything changed and this has also impacted human behavior. Thinking and planning long term is in many cases not for this century anymore. The speed of change is so intense that long term investing is by now much more speculative than short term dealing.

Just take a look at almost any industry and think back “long term” (say five years). Now question yourself to what extent  investors could have anticipated developments and had done well when sticking to their 2003  investment?

Investors have the right to make mistakes, after all it is their own money and they are merely aiming for a good return. Looking at banks it is clear that the stock markets have not been as efficient as the economic scientists believed. So investors could not even rely on the fundamentals of a free market economy. The price setting of shares requires balance sheets that adequately and frequently report the risk exposure. The absence of clear insight in the risk exposure prevented proper price share setting.

I wonder if the current crisis would have been so dramatic when Basel II pillar III was properly implemented. Just take a look at the pillar III report from CBA (thanks ozrisk). When all banks would have been reporting their risk exposure this way, investors could have reacted much quicker.

There are still flaws in this type of reporting, but it is a  good start. For price setting the transparency also requires standardization and regulators need to establish this world wide.  Current reporting is  still a little difficult to understand and insight in underlying scenario’s and parameters should also be clear.

Blaming investors is actually stating that stock exchanges do not function, because investors  know how to price risk. This assumes however that  risk exposures to a reasonable level are publicly known. Addressing this lack of insight should be on top of  Wouter’s todo list.

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