A Huge Risk in Our Marketplace
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.
Even beyond the nasty realities that transformed stocks like Fannie Mae and Freddie Mac to worthless penny stocks, there's plenty of reason to believe that not much has changed over ensuing years. Many managements have ignored -- or even masterminded -- truly shoddy business practices or looming environmental and resource risks in order to boost short-term numbers. Look good today and let some other sucker worry about tomorrow.
When BP's (NYS: 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."
Another good example is the tragedy at West Virginia's Upper Big Branch mine in 2010. Massey Energy, which has faced a barrage of accusations and ended up acquired by Alpha Natural Resources (NYS: ANR) , has been accused of putting profitable coal production ahead of worker safety. In a recent update, the former superintendent of that mine, Gary May, has pled guilty to federal fraud charges related to the incident.
Short-term thinking doesn't always have such directly dire consequences. Sometimes it just adds up to wasted shareholder value. Years ago, many investors applauded the idea that Eddie Lampert's history of being a top-drawer financial engineer made Sears Holdings (NAS: SHLD) a good investment. That hasn't proven to be the case, and what's more, the company lost its way as an actual retailer.
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 and Upper Big Branch disasters.
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. Costco (NAS: 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 (NAS: 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.
Check back atFool.comon Wednesday, April 11, for Alyce Lomax's next column on environmental, social, and governance issues.
At the time this article was published Alyce Lomax does not own shares of any of the companies mentioned. The Motley Fool owns shares of Costco and Google. Motley Fool newsletter services have recommended buying shares of Google and Costco. The Motley Fool has a disclosure policy. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. Try any of our Foolish newsletter services free for 30 days.