It’s probably safe to assume that the majority of readers of FCLTGlobal’s Blue Book are committed to the idea that investing is a task that revolves around real-world capital allocation and should be treated as a thoughtful long-term exercise. Actual investing involves understanding the interaction between real-world capital deployment, productivity gains, rising living standards, and investment returns. To work well it requires that multiple parties in the investment chain (asset owners, investment managers, company management, end beneficiaries) have alignment on time horizons and sufficient information to measure progress.  We should never take this for granted. 

The phrase “sufficient information” is key. Proponents of efficient markets theory will tell you that the only information required to measure progress is the share price of a company, arguing that it represents the distilled wisdom of investors, taking into account all relevant information. This idea is questionable at the best of times, but it is a particular problem for the long-term minded when long-duration growth stocks display the kind of volatility we have seen in the past few years. Ignoring the short term is all but impossible in the face of share prices doubling and halving in relatively short order. 

Challenges of Long-Term Investing in Volatile Markets 

Ironically enough it could be argued that long-termism has in part been the cause of such high levels of volatility. High pandemic-era valuations implicitly assumed that the virtual-world stocks with rocketing revenues and growth would continue to expand in this way for a prolonged period, as alternatives were restricted and pricing power was strong. Fast forward three years and the much-reduced valuations of the same stocks appear to imply that growth is a thing of the past and that companies will revert to their pre-pandemic state, as if the uptake of new technologies has ceased altogether. Layered on top of all that is the as-taught-in-your-finance-degree mechanical application of a higher discount rate to future profits as interest rates have risen sharply.     

What’s wrong with this? Firstly, the over-simplified extrapolation of recent history into the future on both the upside and the down. The missing part of ‘long termism’ of late has been the acknowledgement that underlying trends matter far more than short-term boom and bust. Cutting through the noise, are these companies adapting to changing realities? Are they making progress, whether early stage advancement of science in laboratories, or next stage growth in market share and earnings? Secondly, there’s the lack of nuance around discount rates. Companies that offer better value than their competitors through the application of technology and business models have pricing power which they can exercise to offset the impacts of higher inflation and interest rates.  This doesn’t seem to be reflected in the uniform reduction in valuations. 

What’s the takeaway? One is that communication is key at all points of the investment chain to make sure that long-termism doesn’t fall apart just when it’s most needed. One of the most valuable things long-term investors can do is to encourage the management of companies to invest for future growth even in the face of an unappreciative short-term market.  

Nurturing Long-Termism through Effective Communication 

In the past year, our investment teams have been spending time with the management teams of hundreds of companies, encouraging them to keep that long-term focus even as average investor horizons are as short as they’ve ever been. Some examples of this are: 

• A well-known innovative health company asked us for input on the proposed methodology and calibration of their proposed equity awards. We met with them to discuss the challenges and importance of setting long-term targets, and appropriate board composition. 

• We met with a chip company to discuss how they gather insight from customer feedback and in particular the needs of AI developers to feed into long-term product development.

• We met with an Asian e-commerce platform to reassure management that market concerns over their lack of near-term profitability were misplaced. We understand and encourage their desire to take advantage of opportunity and that foregoing near-term profitability will multiply future earnings. 

• We met in the US with a payments processing platform which has just switched to quarterly reporting from six-monthly in the wake of a share price fall. This had the hallmarks of unwelcome short-termism, so we discussed it. In the event, management seemed to be striking a pragmatic balance intended to better inform investors without being distracted from what looks to us like sensible counter-cyclical expansion. 

• We presented research to a medical device manufacturer in which we showed untapped opportunities for them in emerging markets, demonstrating that their device facilitates had considerably higher per-unit savings than in developed markets, and why achieving market penetration may be less complicated than it seems. This led the firm to create a dedicated role to address the opportunity.

We don’t usually seek to tell the companies in which we invest what to do – rather we invest in companies where we think management is already strong and aligned with our vision.  But we know that they appreciate and gain confidence from discussions which aren’t about how next quarter’s earnings are looking.  Even if we don’t always agree on everything, offering management the freedom to think long term is a hugely valuable gift which ultimately benefits savers. We will keep on engaging.