The spectacle of modern investment markets has sometimes moved me towards the conclusion that to make the purchase of an investment permanent and indissoluble, like marriage, except by reason of death or other grave cause, might be a useful remedy for our contemporary evils. For this would force the investor to direct his mind to the long-term prospects and to those only.
– John Maynard Keynes
One wonders what Keynes would make of the investment environment today given the short-term view that characterizes so much of both individual and institutional investor behavior. We now live in a world in which people are living longer and in need of retirement funds with a longer shelf-life, and yet, paradoxically, investors are typically more short-term in their focus than ever.
A review of the data clearly reveals the short-term nature of much investment behavior today. Stocks are being held for record-short periods of time, and professional investment managers are generally also taking a short-term view in their management of assets. Wall Street's research coverage is focused on near-term corporate earnings rather than on sustainable earnings growth over the medium term. Moreover, markets have a tendency to overreact to short-term events, particularly missed quarterly earnings estimates, and this fosters the quarterly earnings frenzy.
The financial media is paid to manufacture market noise and has become an over-revved engine in constant need of fuel. In addition, the structure of compensation incentives in the investment management industry further encourages the short-term focus; a surprisingly large number of investment professionals have less than half of their compensation based on longer-term performance measures.
As we will discuss in this paper, we hold the view that there is a time horizon arbitrage opportunity in the marketplace, which managers with a disciplined investment process can capitalize on. Company fundamentals do not change nearly as much as equity market prices, and herein lies the opportunity for investors with a longer-term view.
Numerous market players concur with this view. For instance, CalPERS (California Public Employees' Retirement System pension fund) published its 10 investment beliefs; among them is the belief that “a long term investment horizon is a responsibility and an advantage” that leads them to “favor investment strategies that create long-term, sustainable value.”