Many investors may consider themselves capitalists, but how many ponder whether they’re good capitalists? One of biggest dangers our marketplace faces is when short-term thinking reigns. In February, Mindy Lubber, president of sustainable investment advocacy organization Ceres, penned an article on the “quarterly capitalism” problem, pointing to a sobering research paper from Generation Investment Management. A survey of a group of top asset managers indicated a frightening view of investment time horizons. An astounding 55% said their time horizon is a quarter or less; a measly 20% answered more than a year. And we wonder why disasters occur in our marketplace….
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Many investors may consider themselves capitalists, but how many ponder whether they’re good capitalists? One of biggest dangers our marketplace faces is when short-term thinking reigns.
In February, Mindy Lubber, president of sustainable investment advocacy organization Ceres, penned an article on the “quarterly capitalism” problem, pointing to a sobering research paper from Generation Investment Management. A survey of a group of top asset managers indicated a frightening view of investment time horizons. An astounding 55% said their time horizon is a quarter or less; a measly 20% answered more than a year.
And we wonder why disasters occur in our marketplace. Unfortunately, even after the lessons that should have been learned over the course of the last several years, particularly in the wake of the financial crisis, quarter-by-quarter obsession is still a major problem in investing.
The dangers of living in the moment
Unfortunately, many investors fall prey to the idea that if the short-term stock returns look good, everything must be going fine with their companies. When investors — and corporate managers, for that matter — are obsessed with nothing more than this quarter’s numbers, they’re missing the big picture and building risks of all kinds.
Look good today and let some other sucker worry about tomorrow.
When BP‘s (NYSE: BP) Deepwater Horizon disaster poured millions of gallons of oil into the Gulf of Mexico, not only did the situation result in a tragic loss of human life and environmental endangerment, but it became clear that one of the things BP hadn’t invested in was a plan of action for a worst-case scenario.
Critics have contended that BP’s corporate culture had become one that focused on short-term profit more than long-term business practice. A new book, Run to Failure: BP and the Making of the Deepwater Horizon Disaster, supports that idea. The Chicago Tribune calls it an expose of “a corporate culture that seemed to value controlling costs above human life.”
Building businesses, not boosting quarters
Viewing and investing in businesses through a quarterly lens can have negative effects on the world in general over the long haul, too, even if it’s not as obvious, sudden, and tragic as the Deepwater Horizon disaster.
Squandering resources and gutting economies have terrible long-term effects. We’re still seeing the economic ugliness caused by the financial crisis, too-big-to-fail banks, and speculative, short-term trading.
Fortunately, some companies go far beyond quarter-by-quarter mind-sets and are trying to build businesses that can survive, thrive, and be responsible corporate citizens for the long term. US behemoth and new-to-Australia Costco (Nasdaq: COST) springs to mind; former CEO Jim Sinegal famously disregarded analysts’ short-term expectation that the company could be even more profitable if it cut worker benefits like health insurance.
Now, everybody seems to acknowledge that Costco is an incredibly healthy and successful company, but that fact should have been obvious long before the stock’s successful run over the last several years.
Google (Nasdaq: GOOG) does plenty of things intended not to boost this quarter’s profits, but rather to build its long-term business. For example, take initiatives such as its reuse of gray, or recycled, water in the cooling infrastructure in its Georgia data center, rather than potable water.
Or how about in November 2010, when, out of the blue, Google simply gave 10% raises and $1,000 cash bonuses to all employees? Apparently having a happy and talented workforce was more important than saving the billions these expenditures cost Google.
Are accidents waiting to happen in your portfolio?
As long as investors and corporate managements continue to “live in the moment,” cost-cutting accidents are waiting to happen in plenty of industries as we speak. Investors big and small must come around to the reality that a lack of long-term memory is for goldfish, not investors and business managers.
Real capitalists build great, productive businesses that flourish and grow a future. One of our biggest risks is the refusal of too many market participants to take any responsibility for what the future holds for all of us.
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This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.
A version of this article was originally published on fool.com