In the Summer 2007 edition of the Stanford Social Innovation Review, Charles Conn, a senior advisor to the Gordon and Betty Moore Foundation and a high tech executive, wrote about the short-term focus of most foundations in an article titled Robbing the Grandchildren:
If future generations could vote on how foundations invest their money today, would they choose the current allocation? Byron Swift, chair and executive director of the World Land Trust, suggested this thought experiment to me, and I am disturbed to find that my answer is no……U.S. charitable foundations are better positioned than companies, governments, and universities to address these long-term, potentially catastrophic problems. One of the few sources of long-term risk capital, they control more than $500 billion in assets, generating funding that with other charitable giving totals almost 2 percent of GDP. With Warren Buffett’s gift, the Gates Foundation alone will control more than $60 billion in assets and $3 billion to $5 billion in annual spending. Other foundations closely associated with the digital revolution (such as Dell, Ellison, Packard, Hewlett, Moore, Omidyar, Page and Brin, Yang) could account for at least $50 billion to $70 billion more.
Perversely, though, many of these new tech entrepreneurs are worsening foundations’ shortsightedness by implementing businesslike metrics and controls in a way that reinforces short-term thinking and behavior. Other questionable management practices, such as low payout rates and lack of coordination with other organizations, further aggravate foundations’ myopia…
…A recent movement, sometimes called philanthrocapitalism or venture philanthropy, seeks to avoid complacency and lack of focus in foundation management by introducing rigorous success metrics and accountability practices. Many of these new-style foundations limit their scope to a few problem areas and, like corporations, intensely monitor outcome metrics, often with tight windows for review. To those of us who came to foundation work after a career in business, this sounds eminently sensible; after all, the foundation world is littered with fragmented, unfocused, and failed programs…
This short-term, metric-focused approach likewise hampers grantees. Foundations take the passionate and committed people in these institutions and harness them to near-term indices of progress. Grantees, in turn, stop playing the long-term game in order to keep the money flowing. They aim lower, too.
I agree completely with Conn’s thesis, but I want to elaborate because Conn fuses “short-term”, “metric-focus” and “businesslike” as if they automatically go hand in hand.
In the stock market, most people have become more and more short-term oriented. In the 1950’s, investors held stocks for an average of 7 years. Today the average is 11 months. Investors have gained access to vast amounts of information they never use to see and yet in many cases have used this information to change their mind more frequently rather than to gain more conviction in their decisions.
Almost all great investors make financial decisions based on a long-term outlook, not a prediction of what will happen in the next three months. At my firm Ensemble Capital Management, we talk about “arbitraging other investors’ time horizons”. In other words, we try to identify situations where short-term bad news about a company causes other investors to sell the stock so that we can buy it at lower prices. We use short-term good news that causes a stock to move higher to sell stock in companies whose longer-term outlook we think is deteriorating. Warren Buffett or most any great investor will tell you that Wall Street’s obsession with quarterly earnings reports is misplaced. Some companies (such as Coca-Cola, a company Buffett has owned a long time) have stopped issuing guidance to investors regarding what their next quarterly earnings might be.
It is human nature to want results as quickly as possible. But to achieve success, we must match our investment decisions to our time horizon. If we want to fix a local school because our child will be attending starting next year, then it might make sense to focus on short-term solutions. But most donors fund issues because they want to have a sustained impact on a situation. The techniques that might reduce crime in a bad neighborhood the most over the next month are unlikely to be the techniques that will have the largest, permanent impact on reducing crime rates over the next couple of decades.
Financial market participants are often short-term focused. They often focus on metrics which describe short-term conditions, but do little to illuminate long-term trends. But great investors and great philanthropists must focus on the information that matters to the long-term success of their projects.
Disclosure: Nothing in this post should be considered investment advice.