Short Termism Hugely Affects Long-Term Wealth Creation

Longterm Wealth Creation

When investing in the market, an excessive focus is made on short-term results at the expense of an opportunity cost of long-term interests is termed Short-Termism. The said performance pressurizes investors & can result in an excessive focus on quarterly earnings, with least or no attention paid to strategy, fundamentals, and far-sighted value creation. Institutions often revert to these pressures by reducing their expenditures on R&D and foregoing opportunities with better long-term potential. These can weigh against delivering operational efficacies or effectively managing the social and environmental risks to their business.

If I have to conclude the investment market over the past year, “volatile” would be quite apt. As we talk of the market, our immediate mind goes to the great oscillations experienced in price movement may be as the result of the referendum. But the sharp changes in assets have been experienced in lower-risk fixed interest investments such as Gilts. 

Volatility has its own existence in the market but recently the societal change viz.  Technological advances or innovative investment products have witnessed huge turmoil of capital flow in a short duration. Now, the question arises as an investor, what is the need for an hour?

With the significant increase in household debt and a reduction in savings, seeking quick results is not conserved by the consumers. It is due to the same that even the core life expectancy has shortened for long-term equity investment. The average holding period for equity investments supports the argument that investors have cut short their time horizons. The average holding period for equity is measured in days rather than years it used to be.

It won’t be adventurous to recognize the role technology has played in granting investors the ability to move quickly between various investments. Computing power has grown exponentially and which has allowed a variety of instruments have entered, to trade quickly and effectively. These elements have led to an increase in Higher Frequency Trading. ETFs and derivatives could also be counted as a strong reason that instigated the short-term mindset of investors, supported by technology, to trade on a regular basis and roaring up capital. 

As allocators of capital, there is a high need to look beyond short-term movements and firmly fix our time horizon over the long period. 

The universal truth about the market is that long-term investing is a must. Indeed, Warren Buffett defines his ideal holding period is forever. The stock markets were and are created for perpetrating long-term capital to good quality businesses. Equity investments align the fortunes of all businesses and shareholders. With time, the funds flow from inefficient businesses toward the ones which are generating revenue. It may be nerve-wracking at times, promoters need to keep concerned about the short-term performance in the context of long-term aims and objectives.

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