Bridge over ocean
1 March 2015 CFA Institute Journal Review

The Case for Long-Termism (Digest Summary)

  1. Louis A. Lemos

Short-term forces are an impediment to long-term investment, which is critical for wealth creation. When these short-term forces are moderated, implementing long-term investment strategies that generate positive long-term excess returns becomes increasingly possible.

What’s Inside?

The author develops a convincing case for long-term investment, referred to as long-termism, as opposed to trading, which is inherently short term in nature. First, he develops a logical argument to show that long-termism is beneficial for society, investors, and corporations that are willing and able to implement it. He then presents four cases of notable long-term investment results that can be linked directly to investors’ willingness and ability to practice long-termism over extended periods.

How Is This Research Useful to Practitioners?

The author’s conclusion is that the case for long-termism is established in both logic and outcomes and that embracing the concept is both an opportunity and a responsibility.

He asserts that deductive logic and a review of the historical record provide significant support for the idea that long-termism, a focus on the future, provides significant benefits to society. Embracing the concept of responsible long-termism led our predecessors to save and invest part of their incomes for a “better tomorrow.” With capital stock and the saving rate increasing, the discount rates used to make saving/investment decisions began to decline. The lower discount rates enabled entrepreneurs to take a long-term view when making investment decisions, leading to a greater rate of wealth-producing capital formation. The shift toward being able to contemplate and invest in ever-longer time periods made possible the subsequent transformation of the subsistence societies of long ago into today’s wealthier and more stable societies.

The author believes that if aspirations for a “better tomorrow” are still relevant, then there is a clear need to address the principal–agent challenges and the complexities that 21st century civilization have thrust on us. Along this line of thought, the author believes that institutional investors, led by the pension fund sector, are well-placed to play a leading role in addressing the challenges of short-termism.

The author builds an inductive case for long-termism by identifying the following three common threads tied to the investment success of John Maynard Keynes, Warren Buffett, MFS Investment Management (MFS), and the Ontario Teachers’ Pension Plan (OTPP): (1) articulating a clear stance and living it, (2) investing in businesses, and (3) balancing conviction and humility. Three further threads run through the successful institutionalization of these three success drivers in the MFS and OTPP cases: (1) autonomy to act, (2) governance and management quality, and (3) human capital.

How Did the Author Conduct This Research?

The author begins by using a deductive logic thought process, which means using knowledge about things that are generally true to think about particular problems, to make the case that long-termism is fundamental to the creation of societal wealth and well-being. Long-termism in a society of agents, the asymmetrical information problem, and short-term biases in the modern world are each discussed to elucidate the challenges and steps toward solving the short-termism problem.

The author uses an inductive thought process that includes the inference of a general law from particular circumstances to further build the case for responsible long-termism. The particular circumstances of four extraordinary investors are examined. Specifically, the investment beliefs, long-term perspectives and behaviors, and performance of John Maynard Keynes, Warren Buffett, MFS, and the OTTP are compared to infer the common threads tied to the investment success of each. The author identifies three common success drivers for all four and further identifies three common threads running through the institutionalization of the success drivers at MFS and OTTP.

Abstractor’s Viewpoint

I believe that the author makes an interesting case for the benefits of long-termism to society and investors. I agree that a proper alignment of principal–agent incentives in the political, commercial, and financial spheres is a critical factor to move from a day-to-day focus to a longer-term view. But I am not confident that the scourge of short-termism will wane anytime soon because political, commercial, and financial agents do not seem to have a willingness or ability to practice long-termism in today’s increasingly complex, instant-gratification, continuous cable news, and social media–driven world.

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