One way of thinking about value investing is that if most people have blind spots or behavioral biases that influence their investment decisions, it should be possible for other investors to use those biases to their advantage. For value investing, that usually means taking advantage of people’s aversion to imperfect narratives or strong companies with poor recent performance. But there is also the idea that too many investors are focused on short-term results, and that simply maintaining a long-term horizon can be enough to get in that.
“Short-termism is said to plague all parties in the investment community, including investment managers, companies, and investors,” writes Michael Mauboussin managing director and head of global financial strategies at Credit Suisse in his recent article A Long Look at Short Termism. “The problem is that short-termism is very difficult to prove. As we will see, many of the common perceived symptoms of short-termism don’t hold up to scrutiny, and there are some legitimate reasons for the shortening of time horizons.”
A short-term horizon isn’t the same as short-termism, says Mauboussin
Mauboussin cites examples going back 80 years of prominent economists and investors worrying about short-termism, so it’s certainly nothing new. Portfolio turnover is higher now than it was back then, though it’s also been dropping for the last few years, but that could be attributed to lower transaction fees and lower taxes as much is changing investor behavior.
But Mauboussin points out that value investors and other contrarians can’t have it both ways. When companies with little to no profit, or even steady losses, are able to launch successful IPOs this is derided as a sign of market froth. But it cannot simultaneously be a sign of short-termism, because the market is necessarily investing in those companies’ futures.
It’s not even necessarily true that a short-term focus is a liability. As the pace of innovation increases it becomes more and more difficult for some sectors to make plans five or 10 years out. Focusing on the next two or three years a simply be an acknowledgment that investing too heavily into today’s technology could leave you behind in the near future.
Short-termism in companies attracts short-term investors
But even if you define short-termism as the pursuit of quarterly results at the expense of long-term value creation, as opposed to just having a contracted investment horizon, Mauboussin argues that companies most likely to engage in this kind of behavior tend to attract investors of the same ilk. So-called ‘information events,’ increased disclosure, and a large proportion of their value in recent earnings are most appealing to transient investors, the fast money that runs after trends and sells at the first sign of trouble. Companies like Warren Buffett’s Berkshire Hathaway Inc. (NYSE:BRK.A) (NYSE:BRK.B) both talk and demonstrate a long-term view, and tend to attract like-minded investors.