We’ve just been reading Seth Klarman’s latest speech at the Harvard Business School. During the speech Klarman provides some great insights into the problems with a short-term orientation in investing.
Here’s an excerpt from the speech:
Consider corporate time horizons. It’s a choice to attempt to maximize corporate results over the very short run and a different and sometimes harder decision to take a longer-term view.
I’m convinced that one of society’s most vexing problems is the relentlessly short-term orientation that manifests itself in investing, in business decision making, and in our politics. Educational and philanthropic endowments, for example, with institutional time horizons that necessarily span centuries, invest their funds with monthly performance comparisons.
Jeremy Grantham (MBA 1966), cofounder of the global investment firm GMO, recently observed in the context of governmental inaction on climate change, “We face a form of capitalism that has hardened its focus to short-term profit maximization with little or no apparent interest in social good.”
Many feedback loops reinforce today’s short-term business and financial-market orientation. Louis Gerstner Jr. (MBA 1965), former CEO and chair of IBM, has written that you always get more of whatever you measure. Certainly, the constant measurement of professional money managers pressures them to perform well over the shortest measurement horizons.
The more pressure you put on money managers for near-term performance, the more short term their focus becomes. And the more pressure Wall Street puts on corporate America to deliver strong short-term performance, the more myopic the underlying businesses become.
No one in the investment business wants to be fired for poor performance (what Jeremy Grantham calls “career risk”). No money manager wants to lose their clients. No corporate CEO wants to be terminated. And as a result, few are willing and able to invest for the long run, to make long-term-oriented decisions, to put aside the short-term performance pressures and personal career or compensation considerations to do the right thing for the business. With excessive short-term pressure, even the wisest and most capable fiduciaries can bend and even break.
As human beings, we experience time quite differently from the institutions we create, populate, and lead. Even when we want to do the right thing, there are bosses, clients, and markets overtly or subliminally pressuring us to take the short view.
As John Maynard Keynes famously noted, “In the long run we are all dead.” It might be tempting to believe that the long run is simply a series of short runs, but the reality is that immediate pressures can overwhelm the long-run view, and even cause us to take actions that are the opposite of what a truly long-term orientation would produce.
We must all be more aware of the distortions and outright mistakes that can arise from too much focus on the near term. But simply extending your focus to the temporal horizon is insufficient. Have you really inoculated your decision-making just by shifting from short-term greedy to long-term greedy? David Brooks was on the right track when he observed: “The things that lead us astray are short term. …The things we call character endure over the long term––courage, honesty, humility.”
You can read the entire speech here – Seth Klarman, HBS Speech – Hard Times
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