The best performers in today's market are decidedly not short-term focused. Amazon and Netflix barely turn a profit, even though they could. Ditto for Tesla (well, maybe they couldn't atm even if they wanted to). The entire tech sector, which has been on a tear, is similarly long-term focused. Snap's stock, for example, isn't being hit because it's not profitable, but it's getting hot because its user base is plateauing (i.e. negative long-term signal).
Do a lot of (most?) companies focus on the short-term? Definitely! But that's rational behavior even from a societal resource allocation perspective. Imagine you're Walgreens, Target, P&G, Kroger, JCrew, or one out of another thousand "boring" (i.e. low upside) companies (like most others). If the upside at your company is limited, why throw money money at "long-term" thinking? It makes more sense to maximize profits now and return profits to shareholders who will in turn invest in the Amazons, Googles, Teslas, etc. who have the technological infrastructure and human capital to generate better returns per dollar of long-term spending.
The end result (which is happening) is that most companies by volume focus on the short-term because most companies in the US are working in a mature market with a well-explored product and have limited upside, while a small number of companies with large upside get a disproportionate share of investment.
As long as the user base is growing exponentially, most questions about valuation and revenue can be hand-waved away. It's a bit dot-com boom still, maybe crossed with a too-big-to-fail mindset, but if the CEO says "our service has 2 billion users, growing 10% quarterly" that still pacifies a lot of investors without any further concern about revenue-per-user. If you've got enough eyeballs, somehow money materializes.
Once we figure out that, say, "Peak Snapchat is 180 million users +/-10%", it becomes a lot more quantifiable to figure out "each user had to generate $23.45 of value per month to justify the company's valuation." And that means asking hard questions about the business.
As for long-term and short-term investments, the more I think about it, the more the "technical debt" concept seems like it has real value for thinking about companies.
A lot of firms take on the corporate equivalent of technical debt all over the place. Deferring maintenance or extending equipment lifecycles, cutting back on training programs that yield cheap promote-from-within employees. Renting knowledge they should own (excessive consultancy and third-party service providers). It always comes back to "let's polish some stuff in the short term, and if we're lucky it won't hurt our long term viability too much." A focus on maximum dividends is likely being bought with at least some technical debt.
Of course, this type of debt never appears on a balance sheet for investors.
So what is that difference? It must be long term bets vs long term stability. A long bet can only be consumed in the literal sense, by selling, until there is nothing left. Whereas a dividend producer will keep producing until failure. It's almost like give a fish/teach to fish. A good portfolio of bets may well be more profitable overall than a bunch of dividends producers (and thanks to the market, we can cash in on those bets at or own pace! (and even bet on greater fools, but that's a different story well deserving of double-nested parens)).
But in the context of retirement, there is one important difference: the cashing in of bets forces us to think about our mortality when we plan our payout (no matter how formal or not the payout plan is), whereas with dividend producers this is only an optimal (even if important) optimization.
With a sufficiently wide spread and high volume, you could realistically live off whatever meagre or fat harvest your retirement package provides each year, and leave all dreams and worries about valuation to your future inheritors. It would not matter at all wether you'd live five years into your retirement or fifty.
Do you mind sharing some examples of said bankruptcies?
Toys R Us, Vitamin World, Gymboree, Payless, Aeropostale, Limited, Claire, Pacific Sunwear, Sports Authority, and Wet Seal were all fairly common chains in America. And this is just the examples in retail.
Could they? That is speculative. Nobody knows what would happen if these companies started increasing their profit margins. It definitely would affect consumer behaviour in a negative way; we just don't know how significant the impact would be.
Also, I don't think that the strategy of trying to monopolize the entire world economy under a few central authorities is going to work in the end so in that sense maybe Amazon and Netflix actually do think short term.
Not really. They could simply stop re-investing in the company, and then that money would become profit.
When betting on technology companies in the long term, you're betting on two things: continued growth and the absence of a competitor that disrupts their business model or industry. To avoid the latter, you need research and development to stay competitive.
I seriously doubt that subterfuge can be perpetrated successfully quarter after quarter.
take any particular company and multiply it by the size of the whole market and you see what we see today: short term thinking across industries, LBOs, big bonuses for executives even in failing companies (toys r us etc)
so, while in any one particular company, yes shareholders wouldn’t put up with that behavior long-term, across the whole market they still get payouts, still have more stable investments that pay dividends etc even if there are those bad actors that wreck companies for thier own will
slightly off-topic, but, for every company that maximizes it’s short-term value, there is usually collateral damage to the people who work there (and thier families), sufferimg low wages, bad conditions, mass layoffs)...that to me is the real issue...
Sometimes that incentive is aligned with shareholders and people working at the said company, but not always.
It would be interesting to look at new methods of corporate governance for making these type of decisions, that involves the investors and people working in the company more directly.
As for involving workers in the company governance - this is common in Europe, I know that at least in Germany and Norway at some size of the enterprise the workers elect representatives for the board.
I think a board seat for employee representative is one way - I'm interested in broader direct democracy type approaches of corporate governance. Blockchain and DAOs feel like an interesting match for this, since many types of corporate activity - bookkeeping, shares (tokens) and token holder voting can be done on the blockchain. We are exploring this with https://Aragon.one
The PE firm may also make the acquired company take on additional debt in order to pay dividends. Or it may sell off assets of the company in order to take dividends out.
The PE firm doesn't get hurt if one of their looted companies goes bust, so there's no incentive to keep the acquired company healthy and viable. PE firms are like parasitic wasp larvae eating their prey from inside.
Just this year this sort of thing drove Toys R Us out of business, and iHeartMedia into chapter 11 bankruptcy.
Then you have Amazon which is assaulting every large retailer. Who has less time to visit a store than parents? The last thing a parent wants to do is make extra trips to stores when they do not have to.
When I heard about TRU going under recently, I was surprised. I had assumed they already went out of business years ago because of Amazon.
No. Bain, KKR, and Vornado took TRU private in 2005, in the process loading up TRU with debt. TRU was spending $400 million a year for paying off that debt, money which would have undoubtedly helped had it been invested in online operations or store refreshes, etc.
The private equity firms hoped to dump TRU on the market with an IPO, which TRU filed for in 2010 but that never took place, probably because it was crippled with debt by the geniuses who did the LBO.
What?! The “BO” in LBO stands for buy out, meaning the PE shop buys the whole company. Of course bankrupting a company you own is a bad thing. I think what you really mean to imply is that someone buys the company later from an LBO shop (maybe even the public in an IPO) and then it goes bust. Does this happen? Of course. But you’re also conveniently ignoring all the enormous PE/LBO success stories. You may not morally approve of the industry, but if there was no value, who would buy a company from the likes of KKR?
Not if you already got your profit out of it and aren't carrying any of the losses. The company's creditors and employees take the loss, not you.