What kind of impact does a short-term strategy have?

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A short-term strategy is one that focuses on what is going to happen soon rather than what is going to happen over time and what you should do as a result.

In business, that might mean focusing on current stock prices, maximising near-term earnings or working out what you are going to say during the next quarterly earnings call with analysts.

It also means that if something is going wrong, you try and patch it up, fix it with something quickly.

Ari Wallach in his TED talk calls these sandbag strategies.

This is where you know there is bad weather on its way, the rivers are overflowing and the dam is broken, there has been no investment and so all you can do is put sandbags around your property.

And this strategy works. The sandbags protect you. The water goes down and everything is back to normal, after the cleanup and disruption. You can do this time after time.

According to Ari – “the insidious thing about this strategy” is that it works – it can help you make numbers, get elected and look like a hero.

In 2012, Francois Brochet, Maria Loumioti, and George Serafeim from the Harvard Business School tried to work out what impact a short-term strategy had on companies.

The hard thing is working out which companies have a short-term approach and which don’t. The team decided to take quarterly conference call transcripts and analyze them.

They coded the words used by senior managers and worked out a measure for short-termism based on a ratio of words that referred to the near-term (a year or less) and the words that referred to the long term.

After looking at over 70,000 transcripts they found that on average more companies focus on the short term rather than the long term.

At the same time, not as many companies are being managed for the short term as one might imagine – many firms are being run with a long-term mindset.

The interesting thing is that companies that are managed for the short-term tend to arract investors who also think of the short-term.

That creates pressures to perform and meet the numbers rather than build the business.

The researchers found that such an approach results in more volatility in stock prices and increases the risk and costs for investors.

As is often the case, a quote from Warren Buffett succinctly sums up the risks inherent in a short-term focus when it comes to business.

Charlie and I cringe when we hear analysts talk admiringly about managements who always “make the numbers.” In truth, business is too unpredictable for the numbers always to be met. Inevitably, surprises occur. When they do, a CEO whose focus is centered on Wall Street will be tempted to make up the numbers.

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