Slow progress – Increasing short-termism is bad news for society; less so for value investors
Economic growth is generally taken for granted these days but it is actually a relativity new concept. As Andy Haldane puts it in a recent speech, Growing, fast and slow“Secularly rising living standards have become the social and economic norm. No-one can recall a time when the growth escalator has moved anything other than upwards. Yet viewed through a long-lens telescope, ‘twas not ever thus.”
The Bank of England’s chief economist goes on to note that, in the 3,000 years prior to the Industrial Revolution, growth was essentially flat. “Secular innovation followed a lengthy period of secular stagnation,” he adds. “Discernible rises in living standards are a very recent phenomenon. If the history of growth were a 24-hour clock, 99% would have come in the last 20 seconds.”
So what changed? According to Haldane, a common theme underlying many theories on growth is patience. “Patience supports saving, which in turn finances investment, the accumulation of capital,” he says. “That capital accumulation, in combination with great leaps forward in the efficiency of its use, is what Neo-Classical growth theory tells us drives growth. Today’s investment is tomorrow’s growth.”
Alighting on interest rates as a “simple, economy-wide, measure of societal patience,” Haldane actually pulls together data on short and long-term rates dating back as far as 3,000 BC. While conceding some of the numbers are “patchy”, he adds: “They suggest interest rates fell secularly in the run-up to the Industrial Revolution, from double-digits to around 3%.
“One interpretation of these trends is that they reflect society’s evolving time preferences. In the run-up to the Industrial Revolution, society became more willing to wait than in the past. That, in turn, enabled saving, investment and ultimately growth. Patience was a virtue. But if society’s time preferences were indeed shifting, that still begs the question – why?”
Psychological research suggests an important driver of patience is income and wealth. “The lower the income, the more impatient human decision-making,” says Haldane. “Surviving on limited means absorbs huge amounts of cognitive energy and causes a neurological focus on the near term.” This can be seen across finance – from under-saving for retirement to over-borrowing from payday lenders.
One of the key technological advancements Haldane picks out as influencing patience is the printing press. “Books contributed to a great leap forward in literacy levels, boosting human capital,” he explains. “More speculatively, they may also have rewired our brains. Books laid the foundations for ‘deep reading’ and, through that, deeper and wider thinking.”
Haldane then references Daniel Kahneman, a regular presence on The Value Perspective, as he argues “this rewiring stimulated the slow-thinking, reflective, patient part of the brain” identified by the Nobel Prize-winning behavioural psychologist. “Technology will have first shaped neurology and then neurology technology, in a virtuous loop,” he adds. “Slow thought will have made for fast growth.”
It will come as little surprise to regular visitors to this site that that final line – and Haldane’s observations on patience in general – appeal to us greatly here on The Value Perspective, seeing as we prefer to take our time sizing up the most appropriate businesses to back and view three to five years as a minimum timeframe for investing in a value strategy.
Nothing lasts forever though and Haldane goes on to express concern about the trend for society to be increasingly short-termist and the consequent risk that “fast thought could make for slow growth”. “Just as the printing press may have caused a neurological rewiring after the 15th Century, so too may the internet in the 21st,” he says. “But this time technology’s impact may be less benign.”
Haldane quotes the dizzying fact that close to 99% of the entire stock of information ever created has been generated this century and the attendant risk – as characterised by information theorist Herbert Simon – that “an information-rich society may be attention-poor”. “The information revolution could lead to patience wearing thin,” Haldane observes.
Some societal trends are consistent with that, he continues, with the tenure of jobs and relationships declining. As one example, Haldane points to how the average tenure of Premiership football managers has fallen by one month per year since 1994, before adding: “And what is true of football is true of finance. Average holding periods of assets have fallen tenfold since 1950.
“The rising incidence of attention deficit disorders, and the rising prominence of Twitter, may be further evidence of shortening attention spans. If so, that would tend to make for shorter-term decision-making. Using Kahneman’s classification, it may cause the fast-thinking, reflexive, impatient part of the brain to expand its influence.
“If so, that would tend to raise societal levels of impatience and slow the accumulation of all types of capital. This could harm medium-term growth.” Haldane also flags up the psychological studies – highlighted ourselves in articles such as Sweet success – that “have shown that impatience in children can significantly impair educational attainment and thus future income prospects”.
Haldane concludes that “innovation and research are potential casualties from short-termism” and points to evidence suggesting that “investment by public companies is often found to be deferred or ignored to meet the short-term needs of shareholders. Research and development spending by UK companies has been falling for a decade”.
In the sphere of investment, meanwhile, there is plenty of evidence to suggest short-termism can lead to higher costs and lower returns. Still, that does point to one silver lining within the looming cloud of impatience envisaged by Haldane – the more short-term the broader market becomes, the greater the potential benefit to those able to adopt a more patient, longer-term investment strategy, such as value.
Fund Manager, Equity Value
I joined Schroders in 2000 as an equity analyst with a focus on construction and building materials. In 2006, Nick Kirrage and I took over management of a fund that seeks to identify and exploit deeply out of favour investment opportunities. In 2010, Nick and I also took over management of the team's flagship UK value fund seeking to offer income and capital growth.
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