It’s no secret. Whether we’re talking attention spans or investing strategies, we live in an age of short-sightedne… oh look! Bitcoin! Everybody wants to make a quick buck. Over the years, priority in the markets has shifted from forward-looking innovation and production to short-term earnings and a ”we’ll get to you later” approach to research and development. Here’s a little tidbit from The Aspen Institute noting this shift:
In a 2007 survey, 31 of 34 corporate board directors, each of whom served on an average of six Fortune 200 boards, said they would “cut down a mature forest or release a dangerous, unregulated toxin into the environment in order to increase profits. Whatever they could legally do to maximize shareholder wealth, they believed it was their duty to do.”[1]
That’s right. Profits over everything. In 1940 a stock was held for an average of 7 years. By 2007 (the time survey above was taken), this had shrunk to 7 months. Today it’s the length of a Vine video (RIP). The stock market today is simply a trading machine. Algorithms, day traders and over-active stock slingers are at home with these short-term investments. Technically, a short-term investment is one held for less than a year.
Now, there can be short-term investments that take place within a long-term plan. Many choose to place dollars in 401Ks or IRAs and they pay fees to active investors who might make short-term investments on their behalf. In this case, the investor owning the plan has a long-term outlook.
But when we get down to it, all of these investments are being placed with real businesses. And if you are in a business, you’re in it for the long-term. A business is a bet on the future. An owner or exec has to make plans and execute over a period of time. They don’t have the luxury of jumping from company to company on a quarter to quarter basis, hoping their payday takes a massive spike.
Turns out that this long-term outlook is pretty advantageous for businesses that do it well.
The McKinsey Global Institute examined the performance of 615 large- and mid-cap U.S. publicly listed companies from 2001 to 2015, looking at patterns of investment, growth, earnings quality, and earnings management. This lens allowed McKinsey to separate long-term companies from others, and then compare their relative performance. Among its findings was that the revenue of long-term firms, which spent on average 50% more on R&D, cumulatively grew on average 47% more than that of the other firms, and with less volatility. Cumulatively, the earnings of long-term firms also grew 36% more on average.[2]
Sure, somebody might get rich by consistently making good trades, but that then becomes their business. They too have to take a long-term view, plan and execute well over a period of time.
This is how it works when growing anything in the real world. It takes time. As it turns out, nomads can’t grow gardens. So when someone is investing for the long-term, they are more fully aligning themselves with the goals of the business.
Investing, in every sense of the word, is expending resources to achieve some goal. It’s often pigeonholed to expending dollars to gain more dollars. But we know it’s more personal than that. At its root, to invest is to “clothe, cover, provide or endow”. Investing in something also means you are committing yourself to a particular undertaking. Think about it. Part of you is being poured into something and someone else.
It’s personal because you are allocating an extension of yourself. But if this is the case, wouldn’t you like to have a real-world connection with what you are pouring part of yourself into? Why not seek good financial returns while also working to build value in something or someone that you believe in?
Are there short-term investments that are personal? Sure there are. I remember sitting across the table from a gentleman providing a bridge loan. He was quite literally taking part in saving our business over a short period of time. Whether I liked him or not, the transaction was very personal. He gave us a chance to survive and we gave him a handsome interest rate.
But many times, becoming truly “vested” in something requires time. In building a business, long-term thinking and future-orientation are hallmarks of success. Why should it be any different for investors that are playing a critical role in a business’s journey – the role of providing fuel for growth?
The very personal investor insight is this: When investing your money, always be clear about your goals. These goals will be unique because you are unique. They will be influenced by things like your age and stage of life, but should also be influenced by much more.
Do you want to make trades in an effort to have some fun and a few bragging rights when you get lucky? Do you want to passively place your money with a professional who allocates dollars on your behalf in an effort to create wealth over time?
Advisors are helpful when they talk about age and stage. That said, it’s not all about risk tolerance based on how close or far away you are from retirement. It’s also about what kinds of people and endeavors you want to fund.
Our aim at Vicinity is to help uncover investment opportunities closer to home. We encourage you to invest where you live, and fund the kind of world that you want to live in.
[2] https://hbr.org/2018/05/why-ceos-should-push-back-against-short-termism