Escaping the near-termism of the capital markets.

One of the key points made in Getting Back to Business is that the daily repricing of assets in the stock market, and the “near-termism” that can result, ends up leading both company managers and investors astray. As a potential solution, I argue in favor of having both focus on cashflows, which are generally much more stable, and lend themselves to longer-term analysis and investment. The challenge of near-termism showed up in two completely separate forums this week. In the first, the Buttonwood column in the October 27 issue of the Economist, very likely now behind a paywall, points out the “agony of the value investor” who has had to endure a full decade of being out of favor. In the “let’s-see-how-we-are-doing-today” environment, a decade is indeed a very long time.  Value’s day will no doubt come, but in the meantime, enjoying the benefits of a cashflow approach–based on significant dividends–would have at least paid those investors while they waited.

The second episode harkens back even further. The primary purpose of the stock market as it grew and evolved in the 19th century was to raise capital for new and expanding business ventures. In recent decades, that has been lost as the economy has matured in the direction of less capital-intensive services, and as capital raising has shifted to the private markets. Rather than serving as a platform to raise capital, the market is now about playing the near-term daily repricing game, a game that can lead to bad decision-making by investors and company managers.  In that environment, executives might be moved to ask why bother being in the public markets if their business does not need significant future capital, they do not compensate their employees primarily with stock, and they would rather not be bogged down in the morass of quarterly public reporting? Apparently that question is now being asked of an iconic American food company–think tomato soup, Andy Warhol, and Camden, NJ–as reported this weekend on CNBC. Here too, a long-term cashflow-based approach rather than a daily share-price based one might have averted the major acquisitions the company has made in recent years to chase growth, and the resulting existential crisis. Rather than try to fix things on the quick with big buys, a cashflow-based approach by management might have allowed better long-term, organic investment decisions.  Gotta go, soup’s on.