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Comment by WalterBright | Hacker News Reader

"short-term pressures were driving their decision-making, often at the sacrifice of the long-term potential of the business."

This is a popular opinion, but I find it difficult to believe. It relies on the notion that stockholders are fools and unable to recognize when a company destroys its long term prospects for short term gain.

The trouble is, once the short term gain is there, who are the short termers going to sell to? A bunch of suckers?

And Wall Street richly rewards companies for long term behavior - there's no other explanation for Amazon's high P/E.

Lastly, the stock market returns for the last 50 years are excellent. If the corporations were all sacrificing long term for the short term, how has such sustained growth been possible?

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This is not popular opinion, it's exactly the truth. There is enormous pressure on CEOs to meet analyst expectations of growth each quater and not meeting them would immediately mean punishment in terms of sell out. This usually translates to continuously cutting costs and eliminating investments on long term bets. Most boards are heavily populated with representatives of investors and fund managers. They make sure that CEO gets enormously rewarded if growth expectations are met or otherwise gets booted out. They also direct hiring of top execs like COOs, CFOs and prefer the ones who are huge cost cutters - specifically the ones who will go with a stick and shutdown any project which didn't had direct impact on business in near term. They are not fools, they are greedy. None of these "activist" investors are long term people. They specialize in forcing buybacks, unnecessary acquisitions, massive layoffs and other "cost cutting" that will result in stock pop so they can cash out and move on to next vulnerable cow. There is reason lots of companies are sitting on massive cash hoards and unable to utilize it because that would translate to increased capex and tank their quarters. Amazon and Oracle are two companies which have battled through this and have huge scars to prove it. There had been a decade when no one was interested in Amazon stock because it used to take deep dives almost every other quarters. Bezo didn't cared much about his massively fluctuating net worth and kept majority votes but other CEOs are not that gutsy.

> This is not popular opinion, it's exactly the truth.

Then which stocks are you sure are doing this, and are you shorting them?

> There had been a decade when no one was interested in Amazon stock

This is simply not true. AMZN has been a solid performer since its IPO. I should know, I'm a happy AMZN long term investor.

> that will result in stock pop so they can cash out

That implies they must find a lot of suckers to sell to. Stock prices are usually driven by analysts who spend their days analyzing companies to predict future performance. Good luck fooling them all.

> That implies they must find a lot of suckers to sell to. Stock prices are usually driven by analysts who spend their days analyzing companies to predict future performance. Good luck fooling them all.

It actually indicates something a bit different. CEO's optimize for their own compensation with bonuses and similar set by quarterly goals. They optimize for meeting goals over company performance.

Externally, companies work on perception. Analysts have no way of knowing if good R&D is still going on or if sales figures are getting inflated. They operate only on externally-visible information. Hence, CEOs (who expect an average tenure of three years) optimize for externally-visible information on metrics over long-term performance.

They also optimize for graft to the board members (so they can keep their jobs), but that's a whole different story.

The exception seem to be founder-run companies. Founders have an emotional stake, a more significant long-term financial stake, and have not gone through the corrupting process of becoming a CEO. Which of those is dominant? Your guess is as good as mine.

> Analysts have no way of knowing if good R&D is still going on or if sales figures are getting inflated.

Analysts are paid a lot to get this right. There are a number of ways to figure this out. I read, for example, of analysts counting cars in store parking lots. Peter Lynch of Magellan Fund fame talks a lot about getting this information via proxies in his book "Beating The Street".

If you follow corporate earnings reports, you'll often see the stock drop on seeing a report of good earnings that exceeded expectations. This is because the analysts got a whiff of a stink coming from the company that their long term prospects weren't so good.

If the corporation is larger, there is a LOT of money (billions of dollars) riding on correctly predicting future performance, and analysts who can figure it out get paid accordingly.

It's just not plausible that CEOs can routinely and easily fool these guys.

I have experienced short-term thinking, driven by stock market expectations, very directly.

Working on a game, we had a build ready two weeks before the end of a quarter, but we weren't quite done. We had just a few minor tweaks that needed just two more weeks to complete, and we in fact delivered a complete game two weeks later...that was ignored, because it was more important to make their quarterly goal than to release a better product.

Turns out there were several games being developed that quarter, and ours was the only one to make it even close to under the deadline. But because they were doing quarterly reports, they were under tremendous pressure to release something, and so an inferior product was released.

Oh, and this was the era of physical cartridges. No updates possible. We put in a ton of extra work to make it perfect and they didn't care.

The international versions were shipped later and included the improved changes. If anyone is interested in seeing the difference, you can probably find the ROMs and a Game Boy Advance emulator: Check out the US release of "Tetris Worlds" and any of the international releases (all include English, but the three different international releases each included other languages as well).

> We put in a ton of extra work to make it perfect and they didn't care.

The question is whether the game would have made more money for the company if it was perfect and shipped later. It is not necessarily true that making a product better and delaying shipping is long term better for the company.

> It is not necessarily true that making a product better and delaying shipping is long term better for the company.

a perfect game released later may either become a classic that has huge long tail potential. A early-to-market game may produce a short hit/fad that passes.

It's almost random which will happen - as those doing these sorts of judgements prior to actually releasing have their own personal biases which can cloud their judgement one way or another.

Of course people can misjudge the details. But that doesn't mean they are deliberately sacrificing the long term for the short term. It just means they are mistaken.

rushing a product out, putting extra pressure on your engineers, squeezing them, is always a sacrifice and a risk. and it's always a long-term loser. you can get away with it a few times, if you do it every single time your engineers will burn out or revolt if the product failure doesn't do it for them.

Sure, that might be true.

Or, as is more common, the people working on a game have way more of a perfectionist streak than is worthwhile given the audiences.

What I always say in these situations: if two weeks worth of work would be the difference between a smash hit and a bomb, then who the fuck screwed up so bad to prioritize those work items to the last two weeks before launch?

If someone really messed up that badly, they should be called out. More often, those last few features really don't matter, and shipping is better than waiting. My experience is all with games that have digital updates, to be fair, shrink wrapped stuff may have different constraints (but similar questions about prioritization).

How did those actions affect sales of the game, the short term stock price, and long term prospects of the company?

This sounds more like a story about management trying to keep their jobs rather than about the stock market.

"no one will remember if the game is late, only if it's great" (seen this attributed to a few different folks)

But that also ignores the realities of deadlines, contracts, and that sometimes "done" is more important than "perfect"

I'm just not totally bought into the idea that at large analysts and large investors can't recognize a short term for long term tradeoff.

There is absolutely no doubt that short term thinking is critical in the modern public company, and certainly examples of detrimental effects of it: at a simplistic level, when executive remuneration and bonuses depend on share prices with quarterly reviews, executive teams can (not do, this is not an absolutist position) focus on short term measures to boost their numbers - maybe they invest less in R&D, maybe they cut training budgets, maybe they fail to invest in long term growth options.

To your other point re Amazon (and really a large number of tech companies) - the multiples we see in these areas are Abberations that are hard to find historical economic rationalisations for. Take Tesla’s PE multiple, for example. At least Bezos laid out to everyone in his first shareholder letter that amazon was going to reinvest everything for pretty much forever. The bottom line: markets don’t always work as efficiently as we believe, and human psychology is the cause

> focus on short term measures to boost their numbers

Again, this relies on fooling the investors who bid up the stock price based on that. How long can a company continue to fool the investors?

I had a CEO once tell me how he had manipulated the accounts for short term gains "because that's what Wall Street wants." But the stock tanked. The only one fooled was the CEO. The company has since disappeared.

The S&P500 is made up of companies that have been around for a while. How long do you think a company is going to last, if quarter after quarter they eat their seed corn? How do you explain the growth of the S&P500, decade after decade after decade, if the stock market is plagued with short term-itis?

As I said, it is not a rule or universal but it is a distinct feature that has multitude of examples, even within a firm, where different business units may be fighting aggressively to hit their numbers for a quarter even at the cost of longer term growth

By the way, if you know of specific companies that are sacrificing long term for short term stock prices, you can make a ton of money by shorting their stock.

That's not necessarily true.

! ‘The market can stay irrational longer than you can stay solvent’

I've done well investing on the presumption that companies are long term focused. I.e. I'm a buy and hold and hold and hold investor. The longest I've held a stock (Boeing) is 37 years. You can check how well it's done for yourself over that time period, and Boeing was constantly charged with destroying the long term in favor of short term results.

It's inconceivable that Boeing was not long term focused with those results.

Not at all. I don't know anything about Boeing in specific here, but:

Say that Boeing was short term focused over that time period but managed to do well, quarter after quarter, continuing to rise. It's possible that if instead Boeing had been long term focused over that time period, each many individual quarters would have been worse, but it could have a higher valuation now.

Of course, that's certainly not proof that they were long term focused, just that they weren't definitely short term focused.

Boeing invests in new airplane programs that can take 10 to 15 years to turn profitable. The charge that Boeing is short term focused makes no sense at all, but that doesn't even blunt the regular charges that Boeing management sacrifices long term for short term results.

From my personal experience I have seen that middle and senior managers make short-term decisions that favor bonuses, rapid growth in their careers that may or may not benefit the company in the long term. As an example the directors and product managers while trying to optimize costs to maximize profits completely lost track of the customer expectations over a decade and the products the company made got disrupted.

> This is a popular opinion, but I find it difficult to believe. It relies on the notion that stockholders are fools and unable to recognize when a company destroys its long term prospects for short term gain.

Not necessarily "fools". "Not experts" and "easy to influence" would be like it. Very much the trouble with the modern democracy: incompetents elect those who scream the loudest and say what they want to hear.

Like many others here, I experienced the short-term thinking firsthand. Reckless and pointless acquisitions and hiring spree to prop up the KPIs and scream to the entire world, "look how great we're doing!!!" is just one example.

> The trouble is, once the short term gain is there, who are the short termers going to sell to? A bunch of suckers?

Absolutely. The greater fool, sadly, is the foundation of much of the modern global economy.

Look at any bubble over the last 50 years.

> I experienced the short-term thinking firsthand

I have too. The company stock tanked and the company disappeared. There's a word for short term companies - "bankrupt". Investors as group are simply not that stupid.

You're talking to a group of people who think they know everything about anything from corporate finance to macro econ to philosophy. People here are generally technocrats with too little belief in others ability and too much belief in their own.

I just try to point out the obvious :-)

From my point of view, if a person was right that X Corp was sacrificing the long term for short term profits, and that nobody else has cottoned on to it, they would be making a fortune shorting the stock.

I.e. if they were so sure they were right, they'd be willing to put money on it.

As for me, as mentioned before, I put my money where my theories are. I'm a long term investor (riding the booms and busts up and down) and have done satisfyingly well for it. I've had my failures, too, riding Enron right down to zero :-) but overall it's been good.

Technocrats will almost always blame their failures on the irrationality of everybody else.

That, or maybe some of these people held senior managerial positions and ran their companies and know what they are talking about.

I more or less agree with this point, but one possibility is that the companies that currently exist are the ones that can survive long term while turning a profit every quarter (or another "number maximizing" strategy), while what is unseen is an entire class of "long term companies" that focus on things like research into "long tail" prospects.

I think from first principles (e.g. just iterating backwards from the first quarter where short-termism has led to long term failures), there's not necessarily a reason to think that this is likely, but I'm not sure it's ruled out by your evidence.

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