Short-Termism – Hurts the Economy

By Drew P. Wilson, CFA
Investment Research Analyst

There are many who believe that short-termism hinders the U.S. economy. On June 6, 2018, corporate titans Jamie Dimon (CEO of JPMorgan Chase & Co.) and Warren Buffett (famed investor and CEO of Berskshire Hathaway), wrote an op-ed in The Wall Street Journal highlighting the problem of short-termism:

“…Companies frequently hold back on technology spending, hiring, and research and development to meet quarterly earnings forecasts that may be affected by factors outside the company’s control, such as commodity-price fluctuations, stock-market volatility and even the weather.”

“…The pressure to meet short-term earnings estimates has contributed to the decline in the number of public companies in America over the past two decades. Short-term-oriented capital markets have discouraged companies with a longer-term view from going public at all, depriving the economy of innovation and opportunity…”[1]

Additionally, a McKinsey Global Institute study that focused on 2001 through 2014 shows that the economic costs can be material. Their research gleaned that firms with a long-term focus had materially higher revenues, earnings, profits, and market capitalizations at the end of this time compared to those who had a short-term view.[2]

Next time, I’ll discuss how short-termism can hamstring many investors’ returns.

[1] Source: The Wall Street Journal’s Opinion, By Jamie Dimon and Warren E. Buffett, June 6, 2018

[2] Source: McKinsey Global Institute, “Measuring the Economic Impact of Short-Termism,” February 2017

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