“We invest for the long-term,” or “we have a longer-term investment horizon than other investors,” are examples of statements made by many capital providers as they vie to invest in new opportunities. It is unusual, and perhaps unique, to encounter an investor who is willing to admit to being a “short-term” investor, which might equate her to a speculator. So, what is meant by “long-term” and why does it matter? Additionally, what do we as long-term investors most care about?
The definition matters in large part because it helps define philosophically how the investor will make ensuing decisions with respect to the initial investment. Long-term investment returns imply that long-term decision making will be accommodated, and that managers will be measured less on near term fluctuations and operating results, and more on the creation of value over an extended period of time. Such thinking also recognizes that, in many situations, the fruits resulting from investment in people and physical assets grow only after years of seeding, fertilizing, and nurturing that investment – in other words, time is required to see the desired results materialize. “Long-term” thinking also suggests that an investor will not allow short-term considerations to unduly influence management decision making. Most business owners seemingly desire to sell their businesses to an investor with a “long-term” orientation, and certainly most managers want to partner with capital that has “long-term” objectives. So, investors with capital to deploy know that it is important to be “long-term” thinkers, and that becomes part of their mantra.
But, then, what is meant by long-term? Certainly, it is not what we see represented on Wall Street by the incessant chatter about quarterly earnings. And we would posit that a year by year focus is not rooted in long-term thinking. At best, the long-term would seem to imply at least a business cycle, and maybe should reference more than one. Perhaps “long-term” means different things in different industries or with respect to different types of businesses. Technological change within a business or industry can certainly impact on the term that an idea, asset or capability is viable, and so it makes sense that “long-term” should be understood within each particular context in which the situation is being considered. Given the difficulty with defining “long-term” in a manner that is generally applicable to all situations, it makes sense to share what we mean in using this phrase.
Our office is in the Joshua Green Building, which was constructed over 100 years ago and it sits on land purchased by Joshua Green in 1908. Our two largest public equity holdings were acquired, respectively, 109 and 90 years ago. The decision to acquire our first private operating company was made nearly two and one-half decades ago. Virtually every investor would agree that these are “long-term” holdings as determined by the passage of time. But the passage of time is an outcome or a result, and so we spend our time trying to assess the predicates that provide us with the opportunity to realize such results.
Which leads us to the question, what do we as long-term investors most care about? One attribute that we studiously examine is the character of those involved with the opportunity we are pursuing – we believe that “character” is a critical contributor to long-term investing. We strongly agree with Warren Buffett’s admonition that “you should look for three qualities: integrity, intelligence, and energy. If you don’t have the first, then the other two will kill you.” Similarly, John Bogle, founder of the Vanguard funds, has stated that “character is the bedrock of the firm that lasts.” One important key to building a long lasting company is the character and integrity of the company’s employees, managers and owners.
As noted in our recent musings, the existence of character and integrity is not a given. In fact, of the five stories on the front page of the October 2 issue of The Wall Street Journal, two were stories about a lack of integrity. One was a story detailing how the general counsel at Equifax, a publicly traded company, concluded it was proper for executives to sell stock with knowledge of a massive IT breach that was not known to the public and another dealt with how money has corrupted the recruiting practices of high school basketball players. Most people, upon reading these articles, would conclude that integrity was clearly absent in both situations. Similarly, we do not simply assume that good character exists within the companies that we investigate for possible investment. David Brooks, writing for the New York Times, has suggested one reason why this approach makes some sense: “Highly educated young people are tutored, taught, and monitored in all aspects of their lives, except the most important, which is character-building. But without character and courage, nothing else lasts.” So, when we begin our inquiry with the hope of making a long-term investment, we focus first on the character, reputation and record of integrity of those people with whom we hope to invest. For it is our belief that long-term investing, and the results that derive therefrom, cannot be realized without their presence.
“Regard your good name as the richest jewel you can possibly be possessed of-for credit is like fire; when once you have kindled it you may easily preserve it, but if you once extinguish it, you will find it an arduous task to rekindle it again. The way to gain a good reputation is to endeavor to be what you want to emanate.” Socrates (469-399 BCE).
By Stan McCammon
The views and opinions expressed in this article are those of the author and do not necessarily reflect the official policy or position of JGC
