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I recently stumbled on a new and innovative capital structure that, as far as I can tell, only exists in France. Since 2011, French beauty giant L'Oréal has been rewarding long-term investors with a loyalty bonus.  It goes like this : if you buy L'Oréal shares, register them before the end of 2016, and hold them till 2019, you'll start to enjoy a 10% dividend bonus come January 1, 2019. So if L'Oréal declares a dividend of €1.00 in 2019, anyone who has held since 2016 gets €1.10. Not bad, eh? Think of this as an obligatory transfer payment from short-term L'Oréal shareholders to long-term ones. Put differently, if you want to speculate in L'Oréal shares, expect to pay investors a fee, or tax, for that luxury. Unlike most taxes, this one hasn't been instituted by the government. Rather, it's the corporation that is decreeing this particular redistribution of income. How big is the tax? Let's imagine an investment of $10,000 in the shares of a company ...

Arnold Kling is appalled by Lynn Stout, who accuses Wall Street of providing too much liquidity: Wall Street is providing far more liquidity (at a hefty price—remember that half-trillion-dollar payroll) than investors really need. Most of the money invested in stocks, bonds, and other securities comes from individuals who are saving for retirement, either by investing directly or through pension and mutual funds. These long-term investors don’t really need much liquidity, and they certainly don’t need a market where 165 percent of shares are bought and sold every year. They could get by with much less trading—and in fact, they did get by, quite happily. In 1976, when the transactions costs associated with buying and selling securities were much higher, fewer than 20 percent of equity shares changed hands every year. Yet no one was complaining in 1976 about any supposed lack of liquidity. Today we have nearly 10 times more trading, without any apparent benefit for anyone (other than W...

One more post on equity deposits. My last post described a dirt cheap (and hypothetical) way for long-term investors to get exposure to equities. Briefly, an investor commits a certain amount of money to a one-year term deposit that promises an equity index-linked return. The manager of this equity deposit (ED) invests that money in an appropriate number of shares in the companies that make up the index, then lends these shares out to borrowers for one year at a fixed rate. At the end of the year the stocks on loan are recalled, sold, and the investor's deposit is repaid. The interest earned on stock loans is shared with the depositor, boosting their returns. It's worth pointing out that ETFs already lend out shares, but unlike an ED they can only do so on an overnight basis. So an ETF can't harvest the extra term premium on long-term loans. EDs have a broader social purpose than just saving a few bucks. Here's a quick list: 1. Equity deposits would reduce the dead wei...

John Bogle, father of passive investing With fees as low as 0.10%, passively managed ETFs are one of the cheapest ways to get exposure to equities. Not bad, but here's a financial product that would be even cheaper for investors: an equity deposit . I figure that equity deposits would be so cost efficient that rather than charging a management fee, investors would be paid to own them . To understand how equity deposits would work, I want to make an analogy to bank deposits. Think of an equity ETF as a chequing account and an equity deposit, or ED, as a term deposit. In the same way that chequing deposits can be offloaded on demand, an ETF can be sold whenever the owner wants, say on the New York Stock Exchange or NASDAQ. Equity deposits, like term deposits, would be locked in until their term was up up. Issued in 1-month, 3-month, 1-year, 3-year, and 5-year terms, EDs would replicate a popular equity index like the S&P 500. Given that both ETFs and EDs track the same index, and...

Measuring liquidity is a pain in the ass. The value of a good, say an apple, is easy to calculate; just look at the market price for apples. Unfortunately, doing the same for liquidity is much more difficult because liquidity lacks its own unique marketplace. Liquidity is like a remora , it never exists on its own, choosing instead to attach itself to another good or asset. For instance, a bond provides an investor with both an investment return in the form of interest and a consumption return in the form of a flow of liquidity services. Since the price of this combined Frankenstein reflects the value that an investor attributes to both returns, we can't easily disentangle the value of the one from the other. Here's a symmetrical (and equally valid) way to think about this. If liquidity is a good then illiquidity is a bad , where a bad is anything with negative value to a consumer. This bad doesn't exist on its own but, like a virus, infects other goods and assets. While a...