A Seth Klarman speech, titled Hard Decisions, about the constant pressure toward a short-term view and the expansive pitfalls it creates. It’s worth reading.
Consider corporate time horizons. It’s a choice to attempt to maximize corporate results over the very short run and a different and sometimes harder decision to take a longer-term view. I’m convinced that one of society’s most vexing problems is the relentlessly short-term orientation that manifests itself in investing, in business decision-making, and in our politics. Educational and philanthropic endowments, for example, with institutional time horizons that necessarily span centuries, invest their funds with monthly performance comparisons. Jeremy Grantham, cofounder of the global investment firm GMO, recently observed in the context of governmental inaction on climate change, “We face a form of capitalism that has hardened its focus to short-term profit maximization with little or no apparent interest in social good.”
Many feedback loops reinforce today’s short-term business and financial-market orientation. Louis Gerstner Jr., former CEO and chair of IBM, has written that you always get more of whatever you measure. Certainly, the constant measurement of professional money managers pressures them to perform well over the shortest measurement horizons. The more pressure you put on money managers for near-term performance, the more short-term their focus becomes. And the more pressure Wall Street puts on corporate America to deliver strong short-term performance, the more myopic the underlying businesses become.
As human beings, we experience time quite differently from the institutions we create, populate, and lead. Even when we want to do the right thing, there are bosses, clients, and markets overtly or subliminally pressuring us to take the short view. As John Maynard Keynes famously noted, “In the long run we are all dead.” It might be tempting to believe that the long run is simply a series of short runs, but the reality is that immediate pressures can overwhelm the long-run view, and even cause us to take actions that are the opposite of what a truly long-term orientation would produce.
We must all be more aware of the distortions and outright mistakes that can arise from too much focus on the near term.
He makes a good argument.
From an individual investor perspective, the short-term view is just as enticing, despite the lack of career risk. One of the easiest ways to not get sucked into the trap is to cut out (almost all of) the news.
In a world where the news cycle seems to speed up with every controversial event, where attention seeking apps are the norm, and where hardware relentlessly buzzes and chimes at the most minor alerts, it’s easy to fall into the short term trap. Detachment is not only healthy, it’s liberating.
So you can try to keep up with the flood of information, risking your sanity. It also comes with the risk of confusing noise with news, driving a further focus on the short term, ending up overconfident, and with an illusion of control. But to what end? To outsmart and outrace everyone else to the next trade, because what other use is there to put so much time and energy sucking from the fire hose of information.
Unfortunately, more information does not equate to better information or even more knowledge. It often leads to worse decisions. If you can’t decipher the news from noise, the overconfidence you induced in yourself leads to excessive trading and worse returns. What you thought was a tool, became a crutch.
Warren Buffett has a simple rule for dealing with information:
What you really want to do in investments is figure out what’s important and knowable. If it’s unimportant or unknowable, you forget about it.
How much of the nonsense spewed daily has any real importance? How much of it is designed to trigger an emotional response? How much is knowable versus opinion and conjecture? How much of it is useful and usable versus clickbaity fluff? How much of it still has importance a week from now? Or a month? Or a year?
Very little.
And Buffett’s simple rule works equally well on all types of information, not just financial (certainly, more beneficial and healthier with the manufactured drama that passes for news these days).
Last Call
- 4 Signs of Short-Term Thinking – R. Greene
- What Can Investors Do About Overconfidence? – Behavioral Investment
- Battling Entropy: Making Order of the Chaos in Our Lives – Farnam Street
- When Hypothetical Becomes Real – ValIdea
- Bogle Sounds a Warning on Index Funds – J. Bogle
- Why “Many-Model Thinkers” Make Better Decisions – HBR
- Ray Dalio on Career, Market Cycles, China Debt (video) – MiB
- Selfish Writing – M. Housel
- On Writing Better: Getting Started – J. Zweig
- On Writing Better: Sharpening Your Tools – J. Zweig
- The 100 Greatest Innovations of 2018 – Popular Science
