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A Huge Risk in Our Marketplace

Alyce Lomax
April 4, 2012

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.