
Short-Termism Is Harming the Economy? - kjw
https://www.wsj.com/articles/short-termism-is-harming-the-economy-1528336801
======
kjw
The related CNBC piece cites a McKinsey study on the actual effect -- "Those
in favor of guidance say it improves communications with Wall Street, reduces
share price volatility and boosts a stock's value. But McKinsey & Co. found in
a 2006 study that quarterly guidance didn't affect valuation multiples and
didn't reduce share price volatility. The only significant benefit it observed
was an increase in trading volumes, which is good for day traders but not
useful for most other people."

[https://www.cnbc.com/2018/06/06/warren-buffett-and-jamie-
dim...](https://www.cnbc.com/2018/06/06/warren-buffett-and-jamie-dimon-join-
forces-to-convince-ceos-to-end-quarterly-profit-forecasts.html)

~~~
lostmsu
> which is good for day traders

So, for common folk? Or do they mean people, who do it professionally?

~~~
hbosch
Day traders are people who trade the same equity within the span of a single
day, basically, or that’s the definition at a brokerage. If you were to flip
an equity a couple times in a single day often enough, you’ll be labeled a
“pattern day trader” and you will be legally forced to maintain a minimum
balance of $25,000.

Someone correct me if I’m wrong.

~~~
rpedela
Isn't that only if you have a margin account but cash accounts aren't
required?

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duxup
A CEO at a company I worked for decided he wouldn't provide guidance anymore
because he felt it was damned if he did or didn't. He noted that at the end of
a conference call.

Stock dropped like a rock the next morning as if we were sure to close up shop
or something the next quarter because we provided no guidance.

Even better the following quarters some silly stock people put out notes that
we missed the predicted numbers. The numbers, they just made up their own
predictions, and put that in the press release where they used to note
guidance we used to provide.

~~~
craftyguy
so.. what happened in the long run?

~~~
duxup
Company chugged along like they normally did until being slow to adopt new
tech caught up to them. The CEO and his buddy the CFO lined their pockets as
you would expect until someone bought the company.

But they were solid earners until then as they had put themselves in a good
spot and provided outstanding service (well that was me and my buddies). Stock
never did much as wall street was entering the phase of demanding short term
growth for no apparent reason all the time.

------
thisisit
I wonder if these two big guys with lots of analytics power at their
fingertips have a vested interest in this. I might be wrong but doing
something like this might create information asymmetry where one guy knows
better than the other where the next numbers are going to land.

 _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._

Anyone know paper/article which provides evidence for this? My assumption is
that the number of public companies is lesser more due to consolidation is
various sectors.

~~~
prewett
You must not be familiar with who Buffett is. He is basically the antithesis
of a trader with "analytics power at his fingertips" (by which I assume you
mean computing power). He prefers to make exactly one trade per company: buy a
great company and own it forever, preferably by buying 100% of the company in
cash.

He is a tireless advocate of stock prices reflecting actual value of the
company (and his modus operendi is to know the actual value and buy great
companies when they are at a substantial discount to it). He split BERK into
BERK.A and BERK.B when the stock price got so high that people were
speculating on it and it no longer reflected the intrinsic value. He doesn't
say what the intrinsic value of BERK is, but he reports book value every year
and has a standing order to buy if it is 1.2X book value or below, which puts
a floor on what he thinks the intrinsic value is.

He also strongly believes in management thinking long-term instead of short-
term, and frequently says so in his shareholder letters. This is entirely
consistent with his philosophy. If you want vested interest, his buy-and-hold
strategy does best when management considers long-term growth rather than
short-term manipulation. However, he thinks it is better for shareholders in
general, not just himself. Given that he's giving away all his stock after he
dies, which can't be that many years from now, he isn't doing this for
monetary gain.

~~~
perl4ever
"He prefers to make exactly one trade per company: buy a great company and own
it forever, preferably by buying 100% of the company in cash."

I don't think you've paid attention to what Buffett does to make money in the
last decade or two. He targets companies that are or may be desperate, and
tries to exchange his endorsement for things like preferred stock and warrants
at unbelievably favorable terms. He did this with Goldman Sachs during the
financial crisis. He tried to make a deal with Uber recently. He is absolutely
nothing like the folksy myth you reference.

~~~
adventured
You're factually mistaken. The extreme majority of his activity the last 15
years has not been taking advantage of weak companies and lending his
reputation. He lent several massive financial entities money and his
reputation during the fallout from the great recession, which helped those
companies a lot and he made money, a great win for both parties.

Bank of America and Goldman Sachs came out of it in stellar condition. Both
are printing record profits. Like I said, a win all around.

Uber isn't in a desperate position, thus they turned Buffett down. They're
loaded with immense amounts of cash, and have no problem raising more.

So your sole examples to claim an outsized pattern of behavior, come from the
great recession.

Otherwise, we have: the acquisition of Precision Cast Parts for $37 billion,
buying Pilot Flying J, buying out Iscar, acquiring Duracell, acquiring Van
Tuyl, acquiring NV Energy, funding the merger of Kraft Heinz and holding a
huge position, Lubrizol for $9.7 billion, and Burlington Northern (2009).

A hundred billion dollars worth of acquisitions over a decade.

On the investment side: a massive investment into Apple, on a bet that they're
a strong company and will continue to spit off vast profits for a long time to
come. A large investment into IBM (sold). Investments into Southwest Airlines
and other airlines. And so on, without another single example of your premise.

~~~
perl4ever
I think you're ignoring the subtlety of what he does. Profit is what counts.
He doesn't make profit proportional to his investment on everything alike.

I wasn't debating his ethics, just saying he does not make money by simply
buying solid businesses and holding them forever.

He has a collection of solid businesses that provide cash and allow him to
collect large amounts of money on rare occasions in special situations because
he's the last resort. It even has a name: "The Buffett Premium".

He made $3 billion on GS, $12 billion on BOA, some 70% on HCG...he's been
called a loan shark, and that is enabled and complemented by the solid
companies owned by Berkshire Hathaway.

Article about his investments in banks:
[https://www.fool.com/investing/2017/07/05/a-timeline-of-
warr...](https://www.fool.com/investing/2017/07/05/a-timeline-of-warren-
buffetts-bank-stock-buys.aspx)

~~~
jonhendry18
"He made $3 billion on GS"

Which is less than this year's $4.1 billion bonus pool at GS. So hardly a
"loan shark".

Furthermore he made the $3 billion by converting warrants to common stock, so
it's actually not like GS paid out of capital or profits. Perhaps GS stock was
diluted somewhat by issuing new shares? (Not sure.)

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titzer
Sir, it's quite possible this economy is not entire stable.

Not entirely stable!? Well, I'm glad you're here to tell us these things.
Chewy, take the professor in the back and plug him into the hyperdrive.

------
volgo
Like the reasoning, but not the idea.

1.) The only time new information really comes out is during quarterly
earnings, and that's also when prices are most volatile and jumps the most. If
you make it annual, then an entire year has gone by before new information has
come out, and the floodgate of 12 months of data will force the price to jump
even more. If a company misses an entire year of earning, it's stock is pretty
much done for a while. That would seem to make it even more urgent for CEOs to
manipulate their prices

2) Frequent releases help level the playing field between big institutional
funds and smaller players (as much as they can be leveled). In the absence of
public info, the ones with most resources can spend money to get more valuable
data - field research, product analysis etc. Ex: Because the data is so
valuable, it might be cost effective for a $50 billion fund to hire hundreds
of people to literally stand outside a bunch of Chipotle chains all over the
country and count how many people eat there. You could spend up to $20m for
that data and make a huge trade based on it.

3.) You can already sort of ignore the quarterly earnings. You can tell
analysts to shove it and not provide guidance and just release the minimum for
SEC mandated quarterly releases without any discussion or call. You can focus
on investing long term and ignore the earnings for each quarter. You can also
ignore the short term price drop that comes with not providing those
information. Then at the end of the year you can do a long call and go in
depth. If you do this, you essentially follow the model described in the
article without forcing everyone to do the same.

~~~
djrogers
I think you missed the details here - the idea is not to stop providing
quarterly earnings reports, it’s simply to drop the forecasts from said
reports.

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DreamSpinner
What I'd rather see is monthly "lightly audited" financials. This would
provide a lot of benefits around transparency, reduce the incentive for
quarterly and annual "cramming / forward entry" of sales, and provide for more
of a "continuous audit" for the various accounting firms - reducing the size
of the end-of-year rush (since most audit activity should already have been
completed) and making it harder for companies to fudge their figures.

~~~
stretchwithme
What if you released raw numbers every month or constantly? How many cars
sold, cash in the bank. Any number that would not help your competition. And
that require no preparation.

~~~
nradov
Right with modern continuously closed accounting systems there's no reason
this couldn't be done. Inertia and tradition are the only reason for releasing
financial statements on a quarterly basis instead of more frequently.

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erikb
I found it's not necessarily short-term thinking. It's selfish thinking,
reason being that most team/corp/market wide problems usually have to resolved
by everybody, while the seemingly success based gains are consumed by a few.

------
timavr
I never saw a problem with it.

The problem is with maximizing the stock price in the short terms versus in
the long term. And it is all up to CEO to communicate his plan and then
pressure on earnings will be less.

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mozumder
Why isn't financial information a real-time report, updated to the nanosecond?

Why are financial reports split into quarters?

The fact that we split financial data itself into quarters is what drives this
short-termism. You now have an official timeline on performance metrics.

Databases can track financial data in real time. Just give real-time
information, and let each stock trader use their own measure of financial
performance, whether it's hourly tracking for day-traders, or years-long
tracking for long-term investments.

~~~
milesskorpen
Because it takes real work to reconcile this information, make sure it adds
up, and doesn't have errors. Doing that real time would be very very difficult
for most businesses.

When a company releases their quarterly reports they're certifying that the
information contained is accurate (and audited). That would be nearly
impossible realtime.

~~~
mozumder
Reports can be arranged so that reconciled & unreconciled transactions are
separated into their own timelines. Auditing of transactions can happen daily.

It's not an impossible problem.

~~~
AznHisoka
Wouldnt this make very little difference for regular investors because of how
fast the market reacts to new information?

Suppose you found out Netflix had a $1 billion cost expense in real-time. The
market would react to it faster than you or I could anyway. By the time you
knew about it, the stock would have plummeted.

~~~
mozumder
You'd have the same in a quarterly report surprise anyways.

~~~
russdpale
Seems to me pressure on the worker would just go up, as now the shorttermism
is microtermism. We need longer outlooks, not shorter. Who cares about
traders?

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wtvanhest
I have worked on Wall Street, and now in FP&A. I agree with their assessment
for several reasons:

External outlooks rarely provide value to wall street.

They are internally time consuming for FP&A.

I'm confident that they take time and mindshare away from CEOs that could be
spent on improving the company. Further, new CEOs usually have no experience
with Wall Street so they must learn on the job which further exacerbates the
time and energy required.

I hope that this gains traction as it will help all companies become more
productive.

------
cepth
A more recent study from McKinsey in a similar vein:
[https://www.mckinsey.com/~/media/McKinsey/Featured%20Insight...](https://www.mckinsey.com/~/media/McKinsey/Featured%20Insights/Long%20term%20Capitalism/Where%20companies%20with%20a%20long%20term%20view%20outperform%20their%20peers/MGI-
Measuring-the-economic-impact-of-short-termism.ashx).

Of interest, on page 2 there is a survey result: "87% of executives and
directors feel most pressured to demonstrate strong financial performance
within 2 years or less", and "55% of executives and directors at companies
without a strong long-term culture say their company would delay a new project
to hit quarterly targets even if it sacrificed some value".

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jpwgarrison
Dammit. Of all the articles that need to be paywall restricted. I’m down. I’m
sympathetic. But I can only afford to pay for content on a couple of fronts. I
wish it was more. But I cannot right now.

But if that was the article it looks like from the headline? Give it. Away.
For a minute. FFS.

~~~
tomhoward
[http://archive.is/B211l](http://archive.is/B211l)

~~~
jpwgarrison
Honestly thank you personally. But that doesn’t address my comment- I can
sneak around it with computer fu but I’d think this is in the realm of what
should be free. As in not like beer but bread.

~~~
tomhoward
It's a fair enough position, but this discussion happens on every HN
discussion of an article with a paywall, yet strangely enough nothing changes!

The question of how journalism can be commercially sustainable is a very
important one, but it's separate to the topic at hand :)

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zitterbewegung
Looks like this is a submarine story. Similar story from 2016
[https://www.cnbc.com/2016/07/21/warren-buffett-corporate-
gui...](https://www.cnbc.com/2016/07/21/warren-buffett-corporate-guidance-can-
lead-to-malpractice-bad-results.html)

~~~
thinkpad20
Not a terminology I’m familiar with. What does “submarine story” mean?

~~~
rockinghigh
A story that comes up once in a while, like a submarine.

~~~
TeMPOraL
This is a good tell that the story might be a submarine, yes, but the
origin/meaning of this term is pg's essay, as quoted by 'teach.

