A Huge Risk in Our Marketplace

Many investors may consider themselves capitalists, but how many ponder whether they're good capitalists? One of biggest dangers our marketplace faces is when short-term thinking reigns.

In February, Mindy Lubber, president of sustainable investment advocacy organization Ceres, penned an article on the "quarterly capitalism" problem, pointing to a sobering research paper from Generation Investment Management. A survey of a group of top asset managers indicated a frightening view of investment time horizons. An astounding 55% said their time horizon is a quarter or less; a measly 20% answered more than a year.

And we wonder why disasters occur in our marketplace. Unfortunately, even after the lessons that should have been learned over the course of the last several years, particularly in the wake of the financial crisis, quarter-by-quarter obsession is still a major problem in investing.

The dangers of living in the moment
Unfortunately, many investors fall prey to the idea that if the short-term stock returns look good, everything must be going fine with their companies. When investors -- and corporate managers, for that matter -- are obsessed with nothing more than this quarter's numbers, they're missing the big picture and building risks of all kinds.

Even beyond the nasty realities that transformed stocks like Fannie Mae and Freddie Mac to worthless penny stocks, there's plenty of reason to believe that not much has changed over ensuing years. Many managements have ignored -- or even masterminded -- truly shoddy business practices or looming environmental and resource risks in order to boost short-term numbers. Look good today and let some other sucker worry about tomorrow.

When BP's (NYSE: BP  ) Deepwater Horizon disaster poured millions of gallons of oil into the Gulf of Mexico, not only did the situation result in a tragic loss of human life and environmental endangerment, but it became clear that one of the things BP hadn't invested in was a plan of action for a worst-case scenario.

Critics have contended that BP's corporate culture had become one that focused on short-term profit more than long-term business practice. A new book, Run to Failure: BP and the Making of the Deepwater Horizon Disaster, supports that idea. The Chicago Tribune calls it an expose of "a corporate culture that seemed to value controlling costs above human life."

Another good example is the tragedy at West Virginia's Upper Big Branch mine in 2010. Massey Energy, which has faced a barrage of accusations and ended up acquired by Alpha Natural Resources (NYSE: ANR  ) , has been accused of putting profitable coal production ahead of worker safety. In a recent update, the former superintendent of that mine, Gary May, has pled guilty to federal fraud charges related to the incident.

Short-term thinking doesn't always have such directly dire consequences. Sometimes it just adds up to wasted shareholder value. Years ago, many investors applauded the idea that Eddie Lampert's history of being a top-drawer financial engineer made Sears Holdings (Nasdaq: SHLD  ) a good investment. That hasn't proven to be the case, and what's more, the company lost its way as an actual retailer.

Building businesses, not boosting quarters
Viewing and investing in businesses through a quarterly lens can have negative effects on the world in general over the long haul, too, even if it's not as obvious, sudden, and tragic as the Deepwater Horizon and Upper Big Branch disasters.

Squandering resources and gutting economies have terrible long-term effects. We're still seeing the economic ugliness caused by the financial crisis, too-big-to-fail banks, and speculative, short-term trading.

Fortunately, some companies go far beyond quarter-by-quarter mind-sets and are trying to build businesses that can survive, thrive, and be responsible corporate citizens for the long term. Costco (Nasdaq: COST  ) springs to mind; former CEO Jim Sinegal famously disregarded analysts' short-term expectation that the company could be even more profitable if it cut worker benefits like health insurance.

Now, everybody seems to acknowledge that Costco is an incredibly healthy and successful company, but that fact should have been obvious long before the stock's successful run over the last several years.

Google (Nasdaq: GOOG  ) does plenty of things intended not to boost this quarter's profits, but rather to build its long-term business. For example, take initiatives such as its reuse of gray, or recycled, water in the cooling infrastructure in its Georgia data center, rather than potable water.

Or how about in November 2010, when, out of the blue, Google simply gave 10% raises and $1,000 cash bonuses to all employees? Apparently having a happy and talented workforce was more important than saving the billions these expenditures cost Google.

Are accidents waiting to happen in your portfolio?
As long as investors and corporate managements continue to "live in the moment," cost-cutting accidents are waiting to happen in plenty of industries as we speak. Investors big and small must come around to the reality that a lack of long-term memory is for goldfish, not investors and business managers.

Real capitalists build great, productive businesses that flourish and grow a future. One of our biggest risks is the refusal of too many market participants to take any responsibility for what the future holds for all of us.

Check back at Fool.com on Wednesday, April 11, for Alyce Lomax's next column on environmental, social, and governance issues.

Alyce Lomax does not own shares of any of the companies mentioned. The Motley Fool owns shares of Costco and Google. Motley Fool newsletter services have recommended buying shares of Google and Costco. The Motley Fool has a disclosure policy. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. Try any of our Foolish newsletter services free for 30 days.


Read/Post Comments (7) | Recommend This Article (16)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On April 04, 2012, at 10:57 AM, NeilCDenver wrote:

    BOEMRE (Bureau of Ocean Management, Regulation and Enforcement has a far more sanguine opinion of BP's safety record than the main street media and President Obama. I've read their reports, on their new exploration and development projects.

    Additionally, I've read the final Coast Guard and BOEMRE reports, which incidentally were almost a year after our non-justice oriented President condemned BP. They painted a far better picture of BP than either the media or the President.

    The last thing that America needs in times of economic stress is vigilante justice and a President urging his kind to "put on their marching shoes".

  • Report this Comment On April 04, 2012, at 11:58 AM, mattrsanderson wrote:

    Short term thinking and quarterly profit focus have had far more damage on the economy than this article explores. 5,000 American workers die each year in this country. That's an average of 13 a day. All in the name of getting things done faster, so more profit can be had. Check out this link for more info.

    http://www.facebook.com/CostOfConstruction

  • Report this Comment On April 04, 2012, at 12:08 PM, ChanceEldrDancer wrote:

    look at jeremy grantham's recent quarterly letters for further thoughts along these lines

    rich

  • Report this Comment On April 04, 2012, at 7:04 PM, showme wrote:

    NeilCDenver, very disappointing to see such disregard for the point of Ms Lomax's article. But as long as companies that risk death and destruction, and lose face no substantial consequences, what difference does it make. Condemnation without justice is hypocrisy, there's enough of that to go around.

  • Report this Comment On April 06, 2012, at 2:14 PM, cattywampus wrote:

    Thanks for always raising the bar on the community aspects of investing. I think we often times feel alone in our investing mind set and it leads us to the (everyone for themselves attitude). You know you are doing something right when the forces that be see you as a concern to their divide and conquer algorithm. If we react emotionally in the short term we can easily be manipulated and distracted from historical context and the long view. Congratulations on reclaiming your position in the Rising Star group, your in good company with Moser, Bleeker and Tenebruso. Wish I could be a bug on Moser's desk.

  • Report this Comment On April 10, 2012, at 12:00 PM, DJDynamicNC wrote:

    I could maximize my short term profits by refusing to invest in my IRA and instead keeping that money in my cash on hand, but that would be a very poor decision in the long term. It is no different for companies; making investments in sustainability and the foundations on which profits are built make long term sense even while they impact the short term balance sheet in an apparently negative way. That's the essence of investing, and companies that get that are themselves sound investments for the secondary market (i.e. we Fools).

  • Report this Comment On April 10, 2012, at 10:49 PM, BarneyRubbel wrote:

    Great article, best I have read in a long time! Bp is about making money, not safety or the environment.

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