Wall Street's 'Short-Termism' Has It on the Wrong Side of the Trade
Society has become more long-term oriented than it's been in decades. Wall Street must adapt or be left behind.
Maybe it sounds counterintuitive to say we're long-term oriented when hedge funds are hustling for basis points, retail investors are looking for the short-term security of bonds and dividend stocks, the stock market is putting more weight on the current quarter than ever, and we see headlines like Goldman Sachs (GS) ending two-year contracts for investment banking analysts.
But that's just finance. Step away and look at the larger picture. Environmental concern is at an all-time high. Personal health, whether we're talking about smoking, obesity, or nutrition, continues to grow in consumer and political importance. Both political parties are arguing for their plans to rein in long-term entitlement costs, the deficit, and the debt. Conservatives are concerned about the long-term stability of the dollar and energy security. Liberals are concerned about the environment, education, and investment in our infrastructure.
Millennials, so far known as the rental generation, have been reluctant to make long-term commitments to traditional societal institutions like marriage, houses, and corporate employment. Part of this is high unemployment and lack of financial resources, but the other part is they're still figuring out how their longer-term values fit, or don't, into existing institutions, and would rather invest their resources into things with long-term benefits, like education, health, and relationships, while they work these problems out.
What's out of place in 2012? "Sex, drugs, and rock and roll," the ultimate short-term behavior. "Turn on, tune in, drop out." Agent orange and landmines. Photo galleries like this. Microwave dinners.
Wall Street was fortunate because for a long time, its institutions were more long-term oriented than society, and it profited by shortening its time horizon to adjust. Securitization. The rise of shareholder activists and corporate raiders. Increasing leverage. Decreasing regulation. The rise of hedge funds, day trading, and high frequency trading. Investment banks cashing out by going public. Treating employees like any other financial asset. Long-term, values-driven Millennials have no desire to be a part of such a world.
It's time to go the other way. Increasing long-term commitments to employees, employers, partners, and investments. Taking investment banks private. Investing in enterprises for the long term without sweating the short-term volatility. This isn't naive idealism, it's the strategy coming winners will employ.
In this light, I'm encouraged by the trend of recent tech IPOs having dictatorial control over their companies. I want Marissa Mayer running Yahoo (YHOO), not Dan Loeb. In the aggregate, it's a good thing that Mark Zuckerberg of Facebook (FB), Mark Pincus of Zynga (ZNGA), and Andrew Mason of Groupon (GRPN) don't have to answer to shareholders. Of course, if their employees don't buy into their vision, they'll leave. That's the way it should be.
A lot of existing firms won't thrive in this new world. They were way too successful the old way and will stubbornly hold onto their power, focusing on cost-cutting and squeezing employees while they hope things go back to the way things were. But there's an enormous opportunity for those visionary and patient enough to be a part of the coming landscape. This is the biggest theme in finance over the next 20 years.
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