Quarterly capitalism

Too many investors, both professionals and the general public, act on the basis of what Hillary Clinton described as “quarterly capitalism.” 

Many of us are anxious and act on a basis of “short-termism.”

That is not a way to succeed.  By and large, most of us are impatient and have only a short-term horizon. Still history repeatedly reveals that this approach does not work.

It should be acknowledged that almost no one successfully has been able to forecast the market over the near term. There are so many variables that prevent us from basing any action over the short term.

The world’s most successful investor, Warren Buffet, has constantly emphasized the virtue of taking a longer-term perspective.

As oil prices soared in recent years most investors concentrated their investments in that sector. Yet, it should have been obvious that with the greater use of shale oil production and with a sluggish economy, an oil glut was almost certain to occur.

Yet few were willing to hold aside reserve funds awaiting a more favourable time to deploy cash. Furthermore, many corporate executives who have long-term calls on the shares of their companies, are willing to invest at the most propitious time to invest.

In fact, they engage in all kinds of manoeuvres to prop up share prices by programs for businesses to purchase shares in their companies as the immediate result will be higher share prices. Brokerage firms too play this game, predicting that such-and-such commodities or near-term prospects will determine prices.

Accentuating these trends, many professionals act on a split second basis with unbelievably rapid turnover – say just a few seconds to capitalize on fractions of a point change.

Some high-tech firms sell at ridiculously high multiples of earnings as these companies’ shares seem to be volume leaders for the moment. All but forgotten are the views of objective economists who can point out that over the longer term such shares selling at high multiples of earnings rarely are not good investments.

To compound the problems, nowadays we have governments intervening in the bond and stock markets that are anxious to produce good results immediately regardless of the longer-term consequences.

It is no surprise then, that so often the investing public becomes disenchanted with the equity markets.

There are reasons for the economy’s sluggish performance, namely structural factors and not focusing on longer-term returns as too many investors want prompt outcomes, a form of quarterly capitalism.

Financial markets have become a kind of gambling casino. The markets are living in a dream world, but a day of reckoning is inevitable if not imminent.

 

Bruce Whitestone

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