The world has gone mad: Investing for the long term

Image by not­so­good­pho­tog­ra­phy

The world mar­kets crashed recently, and we were reminded of the futil­ity of short term think­ing. A friend wrote a piece about blog­ging (link) Another blog­ger wrote on the virtue of long vs short posts . I read an inter­view in ‘The McK­in­sey Quar­terly’ with Al Gore and David Bloods, founders of Gen­er­a­tion Invest­ment Man­age­ment, which reminded me of my frus­tra­tion with finan­cial mar­kets’ ana­lysts focus on the short term.

Sus­tain­able invest­ment — an Oxymoron?

Why do peo­ple invest? To make money. It is that sim­ple. Most peo­ple are aware of the fact that they will need some level of ‘liq­uid­ity’ in their invest­ments, in case of emer­gen­cies. And for this rea­son, many investors care a bit too much what the mar­ket is doing today and tomorrow.

But sus­tain­able invest­ment needs not be an oxy­moron. Well estab­lished prin­ci­ples of invest­ment high­light that the value of a com­pany is intrin­si­cally deter­mined by the qual­ity of its future cash flows. As such, invest­ments in com­pa­nies that are more sus­tain­able over the long term ought to be also valu­able ones to add to your portfolio.

Crazy stuff: Focus on quar­terly earnings

So why do invest­ment man­agers focus so many of their deci­sions on quar­terly earn­ings? One expla­na­tion is that the key to suc­cess, accord­ing to many, is in the exe­cu­tion. Hav­ing a great plan for the future is not enough; we must make sure that the exec­u­tives at the top of the organ­i­sa­tion are able to exe­cute their plan suc­cess­fully. One way of assess­ing their abil­ity to exe­cute is to observe quar­terly promises of earn­ings, and their follow-through on these promises.

A bal­anced per­spec­tive: Sus­tain­abil­ity

Yet real­ity shows us that bal­ance has been lost. Too much focus has been placed on short-term results; and too lit­tle on long term poten­tial. Some investors have focused on ‘growth poten­tial’ think­ing they are tak­ing a long-term view; but their assess­ment of growth poten­tial invari­ably over-relies on short-term mea­sures and evidence.

A more bal­anced per­spec­tive is required, and Al Gore and David Bloods empha­sis on assess­ing sus­tain­abil­ity is a great start. We need more cre­ative think­ing that draws from our expe­ri­ence in assess­ing the long-term impacts of our eco­nomic activ­ity. Envi­ron­men­tal­ism and cli­mate change, with their long-term focus, pro­vide a great plat­form from which to assess an organ­i­sa­tions capa­bil­ity to sur­vive in a chang­ing world.

Make a dif­fer­ence: help us improve

This is more of a Post Script (Ps) on the post than actual con­tent, so feel free to skip. If you fol­low our writ­ing on this space with some reg­u­lar­ity, you will have noticed the dif­fer­ence in length & style of this post. Do you like it bet­ter; and if so, Why? If not, what aspects of our pre­vi­ous style do you like best?

You can also make sug­ges­tions on top­ics on which to reflect; research; and write about. I am always on the look­out for new ideas, and your com­ments are always a source of joy.

Leave your com­ment, and make a con­tri­bu­tion to enrich­ing this space. Your fel­low read­ers will thank you for doing that.

Tagged as: Corporations, Essays, Finance, Life, Philosophy, Reflections, Sustainability, Thoughts