The End Of Short Term Thinking

Short term thinking yields knee-jerk reactions to micro and macro events in life. It creates zero sum games between people, minimizes long term value creation and amplifies corner-cutting. 

Let’s look at quarterly earnings guidance as an example. Companies reporting on the last 90-day performance and forward-looking guidance on what shareholders should expect. Shareholders want to know how the company is performing, so reporting on the previous quarter makes sense, but it’s not critical to provide guidance on what the future earnings looks like. Jamie Dimon once said, “Quarterly earnings are a function of the weather for many companies; commodity pricing, competitor price changes, volumes, etc. all impact the business in the short term.” 

COVID has become a change agent for many companies as they’re simply unable to provide earnings guidance. Companies should instill long term thinking within their organization.

Anything can move the stock price nowadays. 

Short term thinking focuses on today and tomorrow, not on 10-20-50 year horizons. As a result, a bank may not open up a new branch, a clothing company may cut its marketing budget, a restaurant may reduce kitchen staff, a technology company may not invest in R&D, and so on. All of those actions improve the bottom line but are net-negative for long term health and growth of the business.

In a more extreme example, company leadership puts forth aggressive guidance which leads to more aggressive sales quotas which leads to insane pressure on management and rest of the employee base… which leads to fraud. Case in point: Wells Fargo Forced To Pay $3 Billion For The Bank’s Fake Account Scandal.

This not only applies to companies, but also to individuals. All of us should focus on long term outcomes and build for the future. We should play infinite games (or repeated games). Ultimately, repeated games create better cooperation amongst people, helps create long term utilities and minimize zero-sum outcomes. 

Leave a Reply

Your email address will not be published. Required fields are marked *