In early June, Jason Zweig of the Wall Street Journal wrote a thoughtful piece on, as he termed it, the “obsession with short-term performance.” Specifically, he blames investment fund managers for judging the success of their underlying holdings by using periods of time (e.g., quarters or even months) that are simply too short to determine excellence. According to Mr. Zweig, this in turn encourages these firms to take undue risks in order to please institutional investors.
This is not a new accusation. It has been the conventional wisdom for some time that public company executives feel pressure from investors to focus on meeting short-term goals. This effort, in turn, is supposed to prevent or distract these same executives from pursuing long-term goals that are supposedly better for the health of the company
Mr. Zweig’s piece uses the experience of a successful Scottish fund manager to highlight the virtue of investing for the long term. The fund manager, James Anderson of Baillie Gifford, even thoughtfully lists a handful of well-known companies, including Google (GOOG), Apple (AAPL) and Amazon (AMZN), that aren’t “beholden to the habits of quarterly capitalism.”
I disagree sharply with Mr. Zweig and Mr. Anderson on this issue – first because neither man bothers to provide any statistical analysis or other proof that focusing on the long-term at the expense of the short-term provides superior returns to fund investors.
I also disagree because while Google, Apple and Amazon have in fact proven to be good investments over the long term; they are the exception, not the rule. There are vastly more companies both large and small that successfully adhere to the Wall Street ‘Guidance Game’ of providing a financial outlook and then trying to meet or exceed it.
And there are many other public companies using the excuse of “long-term planning” to glide over their failures in strategy and execution. Some may have viable businesses. But because they are unwilling to commit to a plan and execute on that plan, they squander credibility with investors and other stakeholders.
When discussing short- versus long-term investing, it’s important to distinguish between profits and planning. Personally, it’s not important to me that a company be profitable in the short-run. There are plenty of legitimate reasons to be unprofitable.
For example, deeply seasonal companies in the leisure and retail business sectors often lose money in their ‘low seasons’ but are profitable over a year. Examples of such companies include Intuit, Shutterfly and Vail Resorts. All three of these and many others routinely lose money (and burn cash) in some quarters. Yet long-term price charts of Intuit (INTU), Shutterfly (SFLY) and Vail Resorts (MTN) show their stock prices moving up and to the right.
That’s because not only do they have solid business models, they also have managements that have carefully explained why and when they will be profitable and when they won’t. One of our holdings, high-performance computer maker Cray, also falls into this category.
Management has over many years carefully explained that the recognition of revenue and earnings for a given quarter is widely variable, but that over longer periods (i. e., years) is more predictable. And the markets now reflect this, and don’t over-react to what might seem at face value to be large quarterly earnings “beats” or “misses.”
The bottom line is that well-run companies addressing large and viable markets ought to be able to form a strategic plan and then execute on that plan. Even for periods as short as one calendar quarter. In short, we think great-long term performance is nothing more than a series of great short-term performances.
Conveniently, this leads to a discussion of our late May quarterly re-balance of the Crabtree Technology portfolio. We sold NIC (EGOV), Finisar (FNSR), Measurement Specialties (MEAS), Methode (MEI), Nordion (NDZ), Ntelos (NTLS), Silicon Motion (SIMO), TurkCell (TKC), Take-Two Interactive (TTWO) and Virtusa (VRTU).
We replaced these holdings with new 2% positions in Broadcom (BRCM), Facebook (FB), ESCO Technologies (ESE), Trina Solar (TSL), Ultra Clean Holdings (UCTT), Diodes (DIOD), Echo Global Logistics (ECHO), ARC Document Solutions (ARC), RadNet (RDNT) and PAREXEL International (PRXL). We also added to our existing positions in AudioCodes (AUDC) and in Green Dot Corp. (GDOT) and trimmed back to 2% our Insight Enterprises holding.
May was an improvement over April for the Crabtree Technology portfolio. The Crabtree Technology portfolio rose 2.2% in the month, compared with a 0.7% gain for our Russell 2000 (RUT) benchmark and a 2.1% gain for the S&P 500 (SPX).
Our internal benchmark, the Merrill Lynch Technology 100 (MLO) rose 2.9% in May. The most widely held technology ETF, the State Street Global Advisors’ Technology Select SPDR (XLK) rose 3.8% during the month.
DISCLAIMER: The investments discussed are held in client accounts as of May 31, 2013. These investments may or may not be currently held in client accounts. The reader should not assume that any investments identified were or will be profitable or that any investment recommendations or investment decisions we make in the future will be profitable. Past performance is no guarantee of future results.
