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21/08/20183 mins

I want it NOW: why short-termism seldom pays off

So, we realise that Charlie and the Chocolate Factory might not be the most obvious investment textbook. But bear with us. Remember Veruca Salt? She’s the one in the story whose every whim is gratified and who doesn’t know the meaning of patience. In the 1971 film version, her big song is “I want it NOW”.

When he wrote the book in the 1960s, Roald Dahl was warning against instant gratification and materialistic short-termism. Fifty years on, these problems are still very much with us – especially in a stock market fuelled by 10 years of extremely cheap money.

The “I want it NOW” approach applies equally to companies and investors. On the corporate front, even companies with the best strategic intentions face short-term demands from shareholders and other providers of capital. Quarterly results reporting adds to the pressure, as President Trump has recently acknowledged by asking the Securities and Exchange Commission to look at six-monthly reporting. Under the current quarterly system, people want to see instant results and can lose sight of the long-term outlook. It’s the equivalent of picking up pennies in front of a steamroller.

Many high-profile companies have fallen into the trap of short-termism. Take Kodak. It invented the digital camera but focused instead on the short-term gains from its dominant film business. This meant that it missed out on the long-term opportunity by allowing others to develop the digital concept. The company eventually found itself in bankruptcy.

Investors – even professional investors – are vulnerable to the same tendency. Rather than look for long-term opportunities, they often focus on what’s doing well now. They don’t want to miss out when others are benefiting and they’re afraid of looking stupid by standing apart. The desire to be part of a group is hardwired into our DNA. That’s why the urge to follow trends is so strong.

Perversely, that urge is strongest when the trend is well established: when a stock or sector has been on a tear for months, for example. But investors who succumb to peer pressure at this point are usually late to the party – buying shares after most of the gains have been made. That may seem an obvious point. But all too often, it passes investors by; they see the gains that other have made, and they want them NOW.

The case of Apple is instructive here. In 1997, the company was essentially bust. Microsoft Windows was installed on almost every PC. Apple’s stock traded at less than a dollar – as it had a decade before. But then Microsoft, realising that it could suffer without a competitor, rode to Apple’s rescue with an $150 million investment. Gradually, Apple’s shares began to gain favour with investors. Today, Apple is the world’s largest company by market capitalisation and its shares trade at over $200. Many investors have made substantial gains from Apple – but most of those gains pale in comparison with the returns enjoyed by contrarians who bucked the market sentiment and bought the shares at the lowest of the late 1990s.

As contrarian investors ourselves, we know that companies go in and out of fashion and that choosing stocks that are experiencing difficult times is not always popular or right. We also know, however, that companies with low expectations – ‘ugly ducklings’ – can sometimes offer the greatest long-term rewards. Apple was an excellent investment in 1997 – but, for all its popularity, it looks much less attractive at present.

And that’s why a patient approach beats “I want it NOW”. In Charlie and the Chocolate Factory, Veruca Salt is thrown down a disposal chute by squirrels. For impatient investors, the ride might not be quite so rough – but those who get in at the top could still be looking at a long way down.

 

Please remember that past performance may not be repeated and is not a guide for future performance. The value of shares and the income from them can go down as well as up as a result of market and currency fluctuations. You may not get back the amount you invest.

Please note that SIT Savings Ltd is not authorised to provide advice to individual investors and nothing in this blog should be considered to be or relied upon as constituting investment advice. If you are unsure about the suitability of an investment, you should contact your financial advisor.

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