Saturday, February 12, 2011

Long-term greedy

Being long-term greedy is a philosophy popularized by Gus Levy, former senior partner of one of the most successful financial institutions of all time, Goldman Sachs. It’s just so profitable to be long-term greedy that I can’t for the life of me understand why any company or investor would do things that only have short-term benefits in favor of positioning themselves for the long-term.

A lot of speculators would buy a stock with the hopes of selling that stock with the next quarter or two at a profit.  Not only are these short-term greedy decisions not as profitable as investing for the long-term, it’s gambling and not investing to buy a stock for the short-term and for reasons unrelated to the fundamentals of the business; things might not happen exactly the way the speculator or some idiot on TV that the speculator listened to predicted, and the stock might plunge in value because it missed earnings estimates by 2 cents, or gross margins are down 1%, or some other short-term reasons. Even if you were to invest based on fundamentals, a stock can be irrational in the short-term and its price might not reflect its intrinsic value.

If they’re lucky and their bets pay off, speculators can sometimes make money, just like how a gambler might sometimes win at roulette. But most of the time, those short-term gains pale in comparison to the gains (potentially amounting to many times the original investment of the investor)  that an investor can get if he or she simply invested in great companies at reasonable prices for the long haul. Warren Buffett didn’t try and time the market; he just invested in great companies and let those great companies create value for him over many, many years.

Companies and entrepreneurs can also benefit tremendously from being long-term greedy. Spending a little bit extra to surprise customers or to make up for any problems the customer might have encountered can result in the customer having a good experience and becoming a customer for life, continuing to invest in a downturn when assets are cheap can result in good future profits (I remember reading somewhere that Panera Bread opened some of its most profitable stores during the recent recession), and helping out the communities it operates in because a company cannot thrive when society is suffering (to me, helping others is simply the right thing to do, but being socially responsible do come with long-term benefits) are some of the ways for a company to take a long-term approach.

At the end of the day, investors should look for companies that are long-term greedy, and entrepreneurs should focus on being greedy for the long-term when running their companies, as the companies that are long-term greedy are the ones that create the most value for their shareholders.

Short-term greedy companies have many disadvantages, not only are they less well-positioned for the future, they can also destroy a lot of value for their shareholders. Take the financial crisis for example, the banks could have been in much better shape had they not made out so many loans to people who were buying houses that they couldn't afford. But the banks were only thinking about all the profits they could earn(and the bonuses they could pocket)  by making out those loans, and not thinking about how sustainable those profits really were. A lot of those loans eventually went bad, and many banks either went under or saw their stock plunge in value.

While I'm not saying that the financial crisis could have been prevented if the banks were more disciplined in their lending, I'm pretty sure that shareholders wouldn't have suffered so much if the banks weren't so focused on the short-term. Further evidence of the value of long-term greed: when all was said and done, it was the banks that were long-term greedy and kept their heads in the madness that not only survived, but took advantage of the crisis and acquired assets on the cheap and set themselves up to create good long-term value for shareholders.

Thank you for reading, and may you always sustain good returns on your portfolio. Take care.