Good piece from Larry Fink, chairman and CEO of Blackrock on the long-term cost of today’s widespread cultural “short-termism” focused on fleeting capital gains, trades and gambling rather than long term investment and discipline that builds lasting value. See: Our gambling culture
We tend to speak of short-termism as though it’s a problem that only afflicts investors or corporate leaders, but that’s not the case. Short-term thinking pervades our most important institutions, from government to households. We’ve created a gambling culture in which we tune out everything except the most immediate outcomes. If we’re going to meet our commitments to our children and grandchildren, and to society as a whole, we need to open up the lens and start taking a more responsible, longer-term view of the challenges we face.
…instead of having television shows focusing on the next trade, could we ever have a television show about critical long-term topics such as preparing for retirement?”
The whole piece is worth the read and includes suggested tax law changes that can help to shift the focus to longer-term investment and prudence.
Fink also underlines the dark truth inherent in the business model of Blackrock and other long-always funds, indices and financial managers today: when assets are the most irrationally over-valued and perilous to capital–like 1929, 2000, 2007 and today–the majority keep holding and adding new client capital regardless. They do this because they are not mandated to protect principal and manage risk in accordance with the client’s best interests, but rather to passively track the index through bubbles and through busts.
More than eighty percent of BlackRock’s equity ownership is in index products. So whether we like the company or have concerns about its long-term prospects, if it’s in the index, we have to own it. That’s true even if the company is doing something that accelerates the stock price in the short term but has long-term negative implications—maybe making a massive stock repurchase or issuing debt at an unsustainable level or transitioning to a more volatile business model. The stock may rally for a while, but long-term viability is harmed. We have to be against that, but again, we have to own the stock as long as it’s in that index.