Look to the future and expand your horizons
While quick-fire decision-making seems to work in the short term, it is often counterproductive in the long run, breeding a myopic, stop-gap perspective that can be downright dangerous. If you want to generate sustainable development, you need to take the time to make informed, mature decisions inspired by a vision of the future.
The ability to achieve flashy results quickly is particularly rewarded in a high-pressure environment, whereas taking one’s time is seen as a lack of initiative that deserves to be sanctioned. But let’s not forget the story of Ravenel Curry, founder of the Eagle Capital Management fund. In 1998 — at the height of the internet bubble — Eagle couldn’t find any clients. True to its long-term investment strategy, Eagle was one of the few funds that refused to bet on new technology companies whose growth was fast, theoretical, and questionable — but which delivered immediate results for shareholders. Eagle preferred to invest in companies with a lengthy development cycle, which had a long-term vision, and which were undervalued by the market. It was a wager that reaped handsome rewards. In 2000, two years after the internet bubble burst, Eagle Capital Management’s performance easily outstripped the market, and the losses of the previous five years were largely offset. Between 1998 and 2018, the fund’s return on investment stood at 13 percent, more than double the S&P 500 Index. Today Eagle manages over $25 billion of assets.
Nevertheless, Bina Venkataraman stresses how difficult it is for companies to develop a long-term vision, even though it is an absolute necessity. Taking a step back is the only real way to make reasoned, sustainable decisions with carefully considered consequences. Here’s how to make the shift from a firefighting culture to a culture based on foresight.
Measure the adverse effects of short-termism
A study by the National Bureau of Economic Research of 423 CFOs of US finance companies (conducted between 2003 and 2005) had this to say: decisions made to boost short-term profits — but which turn out to be detrimental in the long run — is costlier for shareholders than fraud. Venkataraman states that the myopia of focusing on immediate results leads to a roadblock. Too many decision-makers sacrifice the investment needed for their organization to survive (innovation, HR, etc.) on the altar of quarterly results. A February 2017 study by the McKinsey Global Institute on the activities of 615 publicly traded US companies showed that firms that rose above the obsession with quarterly earnings generated sales 47 percent higher than their rivals of comparable size in the same sector. The myopia of short-term initiatives is also evident among start-ups in Silicon Valley, which zero in on the number of pageviews and monthly downloads while forgetting about the long-term loyalty metrics that are crucial for their sustainability. Facebook, by contrast, has taken these metrics into account since its creation, hence its success. Then there’s the micro-credit sector, which collapsed in India in 2010 after 107 percent growth over the previous five years. The immediate figures showed an excellent repayment rate, which hid the fact that beneficiaries reborrowed money to cover their initial loans, which had been used to purchase necessities. It was a fatal downwards spiral that had been masked by short-sighted measures.
Uncover the origins of generalized myopia
Excerpt from Business Digest N°301, November 2019