September 1, 2017

'Fostering Long-Termism' In Investing: Are We Approaching A Tipping Point?

“You never change things by fighting existing reality. To change something, build a new model that makes the existing model obsolete.”


 “If you want something new, you have to stop doing something old.”



The ‘Long-Termism’ Quest

The May Letter titled “Fostering ‘Long-Termism’ in Investing” broke the standard ‘4 pages/2,000 words’ format rule. It took 11 pages and 5,000 words to set down my thoughts on the topic. The Letter argued that not only would the broad adoption of long-term investment mindsets reconnect finance to societal wealth-creation, it also offers the prospect of earning extraordinary investment returns for its adopters. So why does short-termism continue to dominate investment practices? The Letter identified three long-termism barriers:

  1. Convention: for lay people and even most professional investment people ‘investing’ continues to fit Keynes’ 1936 ‘beauty contest’ and Treynor’s 1976 ‘fast ideas’ descriptions of it. It continues to be re-enforced on a daily basis in the electronic and print media, and on a quarterly/annual basis through the agendas of the vast majority of retail and institutional investment conferences. Measured in terms of entertainment value, ‘short-termism’ beats ‘long-termism’ hands down. On top of all this, most compensation schemes continue to reinforce ‘short-termism’ conventions.
  2. Exploitation: George Akerlof’s ‘asymmetric information’ thesis applies directly to the market for financial/investment services. Buyers pay too much….and the sellers earn too much for exchanges of too little value. Short-termism has played an important role in this systemic exploitation process, as sellers work hard to convince buyers that they can beat their competitors in a variety of investment beauty contest games.
  3. Information Dysfunction: Peter Drucker observed “what gets measured gets improved”. In a short-termism world, corporate and investment performance measurement systems have short-term orientations. Longer-term information is seldom demanded or provided.

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