On Wednesday, leadership and corporate development non-profit organization the Aspen Institute issued a bold statement to speak out against short-term thinking. It also released a nine page document explaining why it believes that "short-term objectives have eroded faith in corporations" and the foundations of the American economy. The report carries weight for its message, recommendations and the handful of legendary figures that officially signed off on the call to action for investors and corporate managers.

Retire A Millionaire In 10 Steps

The Downside of Short-termism
The report singled out intermediaries including money managers, mutual funds and hedge funds that provide corporations with capital and are overly focused on "short-term stock price performance, and/or favor high-leverage and high-risk corporate strategies designed to produce high short-term returns." This leads to short-term behavior from corporate management.

It cited three primary problems to this approach. First, it is harmful to investor portfolios as it increases trading commissions and can lead to short-term capital gains, both of which eat into gains and overall portfolio capital. The next two concerns speak to the fact that short-term goals fly in the face of long-term value creation and can encourage taking on excessive risk and maximizing near-term profitability that can sacrifice growth over the long haul and sustainable earnings and cash flow generation.

How to Solve Short-termism
Aspen Institute sees three primary solutions to overcome the destructive nature of short-term investment views. The first concerns market incentives to "encourage more patient capital." Remedies in this category include lowering capital gains taxes the longer a security is held or eliminating the restriction that only $3,000 in investment losses per year can be deducted from ordinary income in personal tax returns.

To "better align interests of financial intermediaries and their investors", the Institute recommends changing incentives in 401(k) and ERISA regulations to support investment vehicles that focus on long-term value creation. This could be as simple as including restrictions on the extent to which investment managers are allowed to turn over their portfolios. This keys in on the third recommendation, which is to increase disclosures and eliminate the ability for short-term investors to gain influence over corporations.

For example, the report cited as an example "an activist who becomes a formal shareholder with voting power while simultaneously 'shorting' a corporation's shares or entering into a derivatives contract to hedge away its economic interest."

The Bottom Line
The report was signed off on by investing and corporate legends Warren Buffett of Berkshire Hathaway (NYSE:BRK.A) (NYSE:BRK.B), Vanguard Group founder John Bogle, former IBM (NYSE:IBM) CEO Louis Gerstner and John C. Whitehead, a former chairman of Goldman Sachs (NYSE:GS). These companies, along with Coca Cola (NYSE:KO) and Google (Nasdaq:GOOG), already stand out by being part of a select group that does not provide short-term quarterly earnings guidance.

Jim Collins spoke to the differences in short-term share price maximization and long-term shareholder value creation in his most recent business book, How the Mighty Fall. In it he explained that leaders who build great companies are able to focus on creating share value instead of share prices.

These leaders also differentiate between "shareholders and shareflippers" and seek out investors that understand that it is important "not [to] succumb to growth that undermines long-term value". (For more on long term investing, see our article 10 Tips For The Successful Long-Term Investor.)

Use the Investopedia Stock Simulator to trade the stocks mentioned in this stock analysis, risk free!

Related Articles
  1. Investing

    Procter & Gamble Restructures, Sheds 100 Brands

    All businesses face adversity, and Procter & Gamble is no exception. We take a look at recent developments affecting this global giant.
  2. Mutual Funds & ETFs

    What Exactly Are Arbitrage Mutual Funds?

    Learn about arbitrage funds and how this type of investment generates profits by taking advantage of price differentials between the cash and futures markets.
  3. Investing News

    Ferrari’s IPO: Ready to Roll or Poor Timing?

    Will Ferrari's shares move fast off the line only to sputter later?
  4. Professionals

    Top 5 Highest Paid Hedge Fund Managers

    Understand what a hedge fund is and why hedge fund managers make so much money. Learn about the top 5 highest paid hedge fund managers.
  5. Investing Basics

    6 Reasons Hedge Funds Underperform

    Understand the hedge fund industry and why it has grown exponentially since 1995. Learn about the top six reasons why the industry underperforms.
  6. Stock Analysis

    5 Cheap Dividend Stocks for a Bear Market

    Here are five stocks that pay safe dividends and should be at least somewhat resilient to a bear market.
  7. Investing

    How to Win More by Losing Less in Today’s Markets

    The further you fall, the harder it is to climb back up. It’s a universal truth that is painfully apparent in the investing world.
  8. Options & Futures

    Pick 401(k) Assets Like A Pro

    Professionals choose the options available to you in your plan, making your decisions easier.
  9. Fundamental Analysis

    Use Options Data To Predict Stock Market Direction

    Options market trading data can provide important insights about the direction of stocks and the overall market. Here’s how to track it.
  10. Stock Analysis

    The Biggest Risks of Investing in Berkshire Hathaway Stock

    Learn about the risks of investing in Berkshire Hathaway. Understand how issues of succession, credit downgrade risk and increased regulation could hurt it.
  1. Who do hedge funds lend money to?

    Many traditional lenders and banks are failing to provide loans. In their absence, hedge funds have begun to fill the gap. ... Read Full Answer >>
  2. What licenses does a hedge fund manager need to have?

    A hedge fund manager does not necessarily need any specific license to operate a fund, but depending on the type of investments ... Read Full Answer >>
  3. What do hedge fund analysts do?

    A hedge fund analyst primarily provides support to a portfolio manager on how to best structure the hedge fund's investment ... Read Full Answer >>
  4. Can mutual funds invest in hedge funds?

    Mutual funds are legally allowed to invest in hedge funds. However, hedge funds and mutual funds have striking differences ... Read Full Answer >>
  5. How do dividends affect retained earnings?

    When a company issues a cash dividend to its shareholders, the retained earnings listed on the balance sheet are reduced ... Read Full Answer >>
  6. What is the difference between called-up share capital and paid-up share capital?

    The difference between called-up share capital and paid-up share capital is investors have already paid in full for paid-up ... Read Full Answer >>

You May Also Like

Trading Center
You are using adblocking software

Want access to all of Investopedia? Add us to your “whitelist”
so you'll never miss a feature!