I hear the bogeyman of "short-termism" brought up a lot here, but how accurate is this characterization of investor behavior actually?
The best performers in today's market are decidedly not short-term focused. Amazon and Netflix barely turn a profit, even though they could. Ditto for Tesla (well, maybe they couldn't atm even if they wanted to). The entire tech sector, which has been on a tear, is similarly long-term focused. Snap's stock, for example, isn't being hit because it's not profitable, but it's getting hot because its user base is plateauing (i.e. negative long-term signal).
Do a lot of (most?) companies focus on the short-term? Definitely! But that's rational behavior even from a societal resource allocation perspective. Imagine you're Walgreens, Target, P&G, Kroger, JCrew, or one out of another thousand "boring" (i.e. low upside) companies (like most others). If the upside at your company is limited, why throw money money at "long-term" thinking? It makes more sense to maximize profits now and return profits to shareholders who will in turn invest in the Amazons, Googles, Teslas, etc. who have the technological infrastructure and human capital to generate better returns per dollar of long-term spending.
The end result (which is happening) is that most companies by volume focus on the short-term because most companies in the US are working in a mature market with a well-explored product and have limited upside, while a small number of companies with large upside get a disproportionate share of investment.
I suspect the problem with Snap specifically is less the user plateau itself, and more that it changes the discussion about profitability and value.
As long as the user base is growing exponentially, most questions about valuation and revenue can be hand-waved away. It's a bit dot-com boom still, maybe crossed with a too-big-to-fail mindset, but if the CEO says "our service has 2 billion users, growing 10% quarterly" that still pacifies a lot of investors without any further concern about revenue-per-user. If you've got enough eyeballs, somehow money materializes.
Once we figure out that, say, "Peak Snapchat is 180 million users +/-10%", it becomes a lot more quantifiable to figure out "each user had to generate $23.45 of value per month to justify the company's valuation." And that means asking hard questions about the business.
As for long-term and short-term investments, the more I think about it, the more the "technical debt" concept seems like it has real value for thinking about companies.
A lot of firms take on the corporate equivalent of technical debt all over the place. Deferring maintenance or extending equipment lifecycles, cutting back on training programs that yield cheap promote-from-within employees. Renting knowledge they should own (excessive consultancy and third-party service providers). It always comes back to "let's polish some stuff in the short term, and if we're lucky it won't hurt our long term viability too much." A focus on maximum dividends is likely being bought with at least some technical debt.
Of course, this type of debt never appears on a balance sheet for investors.
Matt Levine repeatedly writes about it with a very good explanation: it would be strange to think that companies should always grow - from time to time there are better investment opportunities outside the company and it makes sense that in such circumstances the company returns money to the shareholders so that they can invest it somewhere else. That outflow of money from the company to the market is interpreted as short-termism - because buying shares by the company looks as if the company tried to increase its share prices instead of making investments.
If you are talking about share buybacks, I think they serve management with stock options exceptionally well.
Sometimes that incentive is aligned with shareholders and people working at the said company, but not always.
It would be interesting to look at new methods of corporate governance for making these type of decisions, that involves the investors and people working in the company more directly.
Dividend and stock buy backs are mostly the same thing - the company returning money to the market, but yeah in the specific case of management stock options they might have different effects.
As for involving workers in the company governance - this is common in Europe, I know that at least in Germany and Norway at some size of the enterprise the workers elect representatives for the board.
Yes, though dividends are taxed differently and usually share price rather than dividend issuance is linked to performance related options/bonuses for management. I think these two things create an artificial preference for share buybacks, and sometimes can influence short term gain seeking (management financial incentives especially are not always aligned with 5-10+ year time span).
I think a board seat for employee representative is one way - I'm interested in broader direct democracy type approaches of corporate governance. Blockchain and DAOs feel like an interesting match for this, since many types of corporate activity - bookkeeping, shares (tokens) and token holder voting can be done on the blockchain. We are exploring this with https://Aragon.one
Private equity firms are notorious for being focused on the short term, to the point of doing LBOs to acquire firms and in the process encumbering the acquired firm with a debt load that cripples its ability to compete.
The PE firm may also make the acquired company take on additional debt in order to pay dividends. Or it may sell off assets of the company in order to take dividends out.
The PE firm doesn't get hurt if one of their looted companies goes bust, so there's no incentive to keep the acquired company healthy and viable. PE firms are like parasitic wasp larvae eating their prey from inside.
Just this year this sort of thing drove Toys R Us out of business, and iHeartMedia into chapter 11 bankruptcy.
> The PE firm doesn't get hurt if one of their looted companies goes bust, so there's no incentive to keep the acquired company healthy and viable.
What?! The “BO” in LBO stands for buy out, meaning the PE shop buys the whole company. Of course bankrupting a company you own is a bad thing. I think what you really mean to imply is that someone buys the company later from an LBO shop (maybe even the public in an IPO) and then it goes bust. Does this happen? Of course. But you’re also conveniently ignoring all the enormous PE/LBO success stories. You may not morally approve of the industry, but if there was no value, who would buy a company from the likes of KKR?
PE firms are like vultures. They are not going around and taking out healthy companies. Accelerating the demise of struggling companies could be argued as a good thing. Talking about Toys R Us specifically, yes a PE firm came in and finished them off, but they had plenty of problems before then. Video games used to be a huge revenue driver for TRU, but the move to digital downloads cut TRU out of the stream (a lot like Gamestop, and what happened to Blockbuster with movies).
Then you have Amazon which is assaulting every large retailer. Who has less time to visit a store than parents? The last thing a parent wants to do is make extra trips to stores when they do not have to.
When I heard about TRU going under recently, I was surprised. I had assumed they already went out of business years ago because of Amazon.
"Talking about Toys R Us specifically, yes a PE firm came in and finished them off"
No. Bain, KKR, and Vornado took TRU private in 2005, in the process loading up TRU with debt. TRU was spending $400 million a year for paying off that debt, money which would have undoubtedly helped had it been invested in online operations or store refreshes, etc.
The private equity firms hoped to dump TRU on the market with an IPO, which TRU filed for in 2010 but that never took place, probably because it was crippled with debt by the geniuses who did the LBO.
Your point about how Netflix and the like are quite the opposite of short term profit maximizers is a very interesting one, because they apparently are not what people expect when lamenting the absence of long-termism (otherwise there wouldn't be much absence to lament), quite the opposite actually.
So what is that difference? It must be long term bets vs long term stability. A long bet can only be consumed in the literal sense, by selling, until there is nothing left. Whereas a dividend producer will keep producing until failure. It's almost like give a fish/teach to fish. A good portfolio of bets may well be more profitable overall than a bunch of dividends producers (and thanks to the market, we can cash in on those bets at or own pace! (and even bet on greater fools, but that's a different story well deserving of double-nested parens)).
But in the context of retirement, there is one important difference: the cashing in of bets forces us to think about our mortality when we plan our payout (no matter how formal or not the payout plan is), whereas with dividend producers this is only an optimal (even if important) optimization.
With a sufficiently wide spread and high volume, you could realistically live off whatever meagre or fat harvest your retirement package provides each year, and leave all dreams and worries about valuation to your future inheritors. It would not matter at all wether you'd live five years into your retirement or fifty.
If a company focuses on the short term to the detriment of the long term, the investors will figure that out and the stock will tank. The only way short term-ism can be profitable to shareholders is if the people selling at the high have inside information that the company is hollowed out.
I seriously doubt that subterfuge can be perpetrated successfully quarter after quarter.
for any particular company, it (big payout for executives) only has to happen once, after that they (execs) can leave/retire/sellout
take any particular company and multiply it by the size of the whole market and you see what we see today: short term thinking across industries, LBOs, big bonuses for executives even in failing companies (toys r us etc)
so, while in any one particular company, yes shareholders wouldn’t put up with that behavior long-term, across the whole market they still get payouts, still have more stable investments that pay dividends etc even if there are those bad actors that wreck companies for thier own will
slightly off-topic, but, for every company that maximizes it’s short-term value, there is usually collateral damage to the people who work there (and thier families), sufferimg low wages, bad conditions, mass layoffs)...that to me is the real issue...
The problem is that companies that just chugged along and paid a dividend have basically died out in favor of companies that borrow against their long term profits for not a lot of upside other than short-term boosts in share price. A lot of recent failures and bankruptcies can be attributed to this phenomenon.
Toys R Us, Vitamin World, Gymboree, Payless, Aeropostale, Limited, Claire, Pacific Sunwear, Sports Authority, and Wet Seal were all fairly common chains in America. And this is just the examples in retail.
It only takes one bridge loan from a PE firm to get yourself in this hole. Neiman Marcus was founded 110 years ago as a traditional department store and is now finding itself in this mess.
>> Amazon and Netflix barely turn a profit, even though they could
Could they? That is speculative. Nobody knows what would happen if these companies started increasing their profit margins. It definitely would affect consumer behaviour in a negative way; we just don't know how significant the impact would be.
Also, I don't think that the strategy of trying to monopolize the entire world economy under a few central authorities is going to work in the end so in that sense maybe Amazon and Netflix actually do think short term.
Could they? If they stopped pouring money into research and development, that would mean that any competitor with superior technology could eventually upend them.
When betting on technology companies in the long term, you're betting on two things: continued growth and the absence of a competitor that disrupts their business model or industry. To avoid the latter, you need research and development to stay competitive.
The best performers in today's market are decidedly not short-term focused. Amazon and Netflix barely turn a profit, even though they could. Ditto for Tesla (well, maybe they couldn't atm even if they wanted to). The entire tech sector, which has been on a tear, is similarly long-term focused. Snap's stock, for example, isn't being hit because it's not profitable, but it's getting hot because its user base is plateauing (i.e. negative long-term signal).
Do a lot of (most?) companies focus on the short-term? Definitely! But that's rational behavior even from a societal resource allocation perspective. Imagine you're Walgreens, Target, P&G, Kroger, JCrew, or one out of another thousand "boring" (i.e. low upside) companies (like most others). If the upside at your company is limited, why throw money money at "long-term" thinking? It makes more sense to maximize profits now and return profits to shareholders who will in turn invest in the Amazons, Googles, Teslas, etc. who have the technological infrastructure and human capital to generate better returns per dollar of long-term spending.
The end result (which is happening) is that most companies by volume focus on the short-term because most companies in the US are working in a mature market with a well-explored product and have limited upside, while a small number of companies with large upside get a disproportionate share of investment.