Short-termism refers to an excessive focus on short-term results at the expense of the long term.
Numerous politicians, on both sides of the aisle, and most recently Hillary Clinton, have sought to blame the weak economic recovery over the last several years, on the perception that corporate America is consumed with an effort to maximize short-term results. This contention has looked to relatively slow capital spending, increased share buybacks and higher dividends as evidence of short-termism.
Perhaps, but consider the following:
- The emphasis on quarterly earnings is probably largely a media driven circus, combined with an excessive focus on analyst’s estimates and microscopic variances between estimated and actual results.
- Most management compensation packages include stock options that gain value through improving share prices over multi-year periods, not on a one quarter spike.
- Annual GDP growth during the current economic recovery substantially trails prior comparable periods. Washington, listen up.
- Wage growth has been unusually weak (Q2 2015 was the weakest in 33 years) and workforce participation is at record lows, leaving consumers unable to support demand growth.
- It’s difficult for managements to justify significant capacity expansion in the face of stagnant demand.
- In the absence of revenue gains, management has focused on margin improvement.
- With interest rates approaching zero, acquisitions are often immediately accretive, while capital expenditures for increased capacity can take years to produce a return on investment.
- The US corporate tax code is an irrational jumble of disincentives that the political class has proven to be unable or unwilling to correct.
- And finally, if you want to talk about short-termism, consider the political class and its focus on the next election cycle rather than the long-term interests of their constituents.
Successful investing is not based on short-termism, unless you are a hedge fund. Most investors, with a long term perspective, seek to find companies with the potential to provide consistent, above average growth combined with the potential for an increasing and predictable dividend.
Bottom line, economic growth of less than 2% isn’t working for anyone. Political class, please note.
All comments and suggestions are welcome.
Walter J. Kirchberger, CFA®
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