Building the Case for Long-Term Investing in Stock Markets: Breaking Free from the Short-Term Measurement Dilemma

Many voices have been raised in recent years extolling the virtues of long-term investing, and condemning the short-termism in today’s stock markets. Pillars of our financial and business community — including the CFA Institute, the Business Roundtable, the Conference Board, the United Nations, the World Economic Forum, and the Aspen Institute — have all prescribed the long term as a cure for our short-term ills. An excessive focus on short-term profits has various detrimental effects. It causes corporate managers to misallocate assets. It introduces dangerous volatility into financial markets. It means society must divert productive resources to repairing environmental and social damage done in the headlong pursuit of profits. In a 2006 report, the Conference Board speaks for many when it describes the dangers of the short term: On a macro-economic level, short-term visions are the cause for market volatility and the instability of financial institutions. From the micro-economic standpoint, they undermine management continuity and expose a public company to the risk of losing sight of its strategic business model, compromising its competitiveness. In addition, the pressure to meet short-term numbers may induce senior managers to externalize a number of business costs (i.e., the cost of a state-of-the-art pollution system), often to the detriment of the environment and future generations.1