March 30, 2011

Long-Term Investing Paradox: World Economic Forum Report

The report says while the need for long-term capital is rising, the ‘ability to make long-term investments is diminishing.’

Long-term thinking and investing is one of the hallmarks of some of the great investors — Warren Buffett may be the most famous example. But, investing for the long term is increasingly hard to do, just at the time when it may be needed most.

A new report from the World Economic Forum with Oliver Wyman, “The Future of Long-Term Investing,” discusses why it is harder to invest long term than before. The “fundamental question,” said Max von Bismarck, director and head of Investors Industries at the World Economic Forum (WEF), is, “have short-term objectives increasingly outweighed a focus on long-term value creation and long-term growth?” Von Bismark spoke on a video outlining the reasons why they conducted the report.

“In the 1980s,” von Bismark adds, “the average holding period for a NYSE stock was five years. Now, it’s five months.” He cites “ever-dropping CEO tenures and a disproportionate focus on quarterly earnings versus long-term objectives,” as further evidence of short-term thinking.

“Many institutions have material short-term financial obligations that must be funded with short-term investments. Furthermore, investors must overcome organizational conservatism and principal-agency considerations to make long-term decisions. These additional internal constraints make funding difficult to find for projects with short-term losses but potentially significant long-term gains,” the announcement, Tuesday, stated.

The world is looking to long-term investors to help fund projects such as infrastructure that have historically been funded by governments. However, these investors are increasingly unable to meet these needs,” von Bismarck added in the release.

There are many factors that contribute to this; the need for liquidity can prohibit tying assets up long term. The investor needs to believe that the longer-term investment will provide “superior returns,” they need to have a risk tolerance or “appetite” that will “accept potentially sizeable losses;” and the decision makers must be willing and able to “execute a long-term investment strategy” according to the report.

Structural or regulatory issuesalso contribute to the inability to execute a long-term investment strategy: “Having to account for mark-to-market price changes for assets that we do not intend to sell for many decades makes it harder for us to hold these assets through a market downturn,” Angelien Kemna, CIO of APG All Pensions Group, Netherlands, stated in the release.

In addition, the release said, “Policy-makers must integrate their dual goals of ensuring solvency and stability of individual institutions with promoting broader global economic growth. When these issues are considered separately, significant unintended effects can arise,” according to Julia Hobart, partner at Oliver Wyman and senior adviser to the project.

Klaus Schwab, founder and executive chairman of the WEF has discussed long-term thinking for a long time, as have Jack Bogle, founder of Vanguard, Buffett and researchers at the Aspen Institute

See more articles about long-term thinking and investing from AdvisorOne:

Greater Good: The Unintended Consequences of Repaying TARP

Warren Buffett’s Playbook: Six Lessons for Top Wealth Managers

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