More on Time Horizons
Social investors are not the only ones concerned about Wall Street's increasingly short-term outlook. Alfred Rappaport of Northwestern's Kellogg School of Management has written an interesting article on short-termism. Rappaport is one of the foremost teachers of discounted cash flow analysis (he wrote the book), but finds in his review of the literature that its use is limited. Instead, investors seem to prefer earnings-based indicators, like P/E and earnings surprise. He believes the "root cause of recent corporate scandals [is] the widespread obsession with short-term performance. There is no greater impediment to good corporate governance and long-term value creation than earning obsession." It is a remarkable state of affairs when economists like Cameron Hepburn argue that DCF analysis is too short term-oriented, at the same time the chief proponent of DCF says it is under-used because it is not short-term enough! What everyone seems to agree on is that Wall Street's concern is with the next 20 minutes. If you're looking for someone to worry about the next 20 years, you've come to the wrong place. Today I read a similar sentiment from a very different source. Terrence Deal and Allan Kennedy wrote the influential Corporate Cultures in the early 80's, and updated their work with The New Corporate Cultures, which came out in 2000. The latter book ends with this comment: "We are optimistic enough to think that we may be nearing the end of a cycle emphasizing the short term over the long term and shareholders over all other valid claimants for their share of the corporate pie. As this troublesome cycle abates, management decisions will show more balance, shaking off some of the recent excesses."