Since the 1960s, the average stock holding period of U.S. investors has shrunk from six years to six months. More than two-thirds of equity-market turnover now is conducted by traders holding shares for a few seconds. Yet for investors, the pursuit of instant gratification can be expensive and counterproductive.
It turns out that “short-termism” may be harmful to more than just those near-sighted quasi-investors playing random squiggles on a stock chart. Businesses that take the short view by boosting quarterly numbers at the expense of productivity-enhancing capital projects also could end up short-changing themselves. And over time, short-changing their shareholder-owners as well.
With corporate investment lagging in the dreary economic aftermath of the Great Recession, it’s been suggested that CEOs are unduly incentivized to increase near-term earnings through share buybacks and dividend increases — a strategy known as “financial engineering” — at the expense of research and development. Of course, buybacks and dividends can also enhance shareholder value, especially in the absence of productive uses for excess corporate cash.
After the acute phase of the 2008 global financial crisis had passed, however, McKinsey & Co. global managing director Dominic Barton warned that the economic patient was not yet healed and that a change of approach was needed to make it so. “Myopia plagues Western institutions in every sector,” he wrote. “In business, the mania over quarterly earnings consumes extraordinary amounts of senior time and attention.” Citing a challenge to “capitalism itself,” Barton concluded that “perhaps the biggest danger is that short-term approaches to investing in and managing companies — the ‘quarterly capitalism’ that led to the financial meltdown — still persist.” A thorough summary of Barton’s recommendations is available on the Harvard Business Review website, and the full report can be purchased for $8.95.
As the 2016 U.S. presidential election shifts into high gear, quarterly capitalism is sure to get plenty of attention. But regardless of what lawmakers do about it, savvy investors can take matters into their own hands — by keeping their hands off the “trade” button and relying on a company’s long-term record and long-term plans. Even if the world is becoming more shortsighted, the future still happens.