The world has gone mad: Investing for the long term

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.

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One response to “The world has gone mad: Investing for the long term

  1. Investing for the long term is risky. Giving your money to a broker is risky. The only way to make money off the market is take care of your own portfolio. Know one care about your money more than you. It can be done if you want it bad enough.

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