Short-termism’s dangerous reaches have extended beyond Wall Street, leading people, corporations, and governments alike to lose sight of long-term goals, argued BlackRock chief Larry Fink.
In an essay for Focusing Capital on the Long Term—an initiative promoting long-term value creation—Fink warned of the “gambling culture” of tuning out everything except immediate results. This unhealthy focus on one-off gains can be partly attributed to the media, the CEO said, and its dependence on “daily bombardments of bad news.”
“Often, there seems to be a great deal more upside to placing a simple bet for a quick win than for staying the course through difficult times to create sustainable gains that are more widely shared,” Fink said.
This sort of myopia is rampant in Washington’s political scenes, he continued, often resulting in policies that reward short-term strategies. Tax codes seem to encourage immediate profits over long-term wins, with capital gains measured in one-year holding periods.
“There seems to be a great deal more upside to placing a simple bet for a quick win than for staying the course through difficult times to create sustainable gains that are more widely shared.” —Larry FinkEven CEOs find it hard to buck the trend, according to Fink, as they face “constant pressure to produce quarterly reports,” which by definition focus on the short term.
However, extended holding periods for capital gains and tax hikes for stocks held for less than six months could help bring in “engaged investors willing to ride out short-term slumps to better position the company for the long haul,” he said.
Fink also criticized companies returning cash to shareholders—often instigated by activist investors—and argued the economy will suffer after the immediate stock spike.
“In particular, people who are riding the current wave will pay for it later when the ability to generate revenue in the long term dries up because of the lack of investment in the future,” he said.
The “scourge of short-termism” is likely to trickle down to individuals, Fink cautioned, particularly in funding retirement plans going forward.
“We’re all going to be living longer,” he said. “We know that. But we haven’t focused on what a longer life means or how we’re going to support ourselves through it.”
Furthermore, the average individual may not be equipped to make proper investment decisions as more retirement schemes migrate from defined benefit to defined contribution plans, Fink said. And these poor investments could lead to inadequate income during retirement.
To remedy this growing problem, Fink suggested more education, communication and leadership. He asked for more television shows about “critical long-term topics such as preparing for retirement” over those focused on the hot stock of the day.
Fink is on the advisory board of the initiative co-founded by the Canada Pension Plan Investment Board and McKinsey & Company to develop practical structures for longer-term behaviors in the investment and business worlds.
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