When Time Isn’t of The Essence
Coverage from the 2017 Global Investment Conference.
BY Jennifer Hughey | November 1, 2017
There is one consequence of globalization that isn’t often discussed but is of great importance to pension funds, says Scott Nisbet, a partner with Baillie Gifford in Scotland — and that’s exacerbated short-termism.
His message reminds plan sponsors of how human beings are programmed to be short-termist in a world where even complex government policies are now made in 140-character tweets. Given that reality, is it futile to think, and act, for the long term?
“In investing, time is not actually of the essence,” Nisbet says, adding that, longer term, plan sponsors will get much better returns. “Time horizons should actually be getting longer because we are living longer.”
According to Nisbet, factors such as the environment and our own human nature are causing reactionary decision-making. “We are beset by short-term noise on all sides, all the time,” he says. “Instant news flow encourages you to do something.” But he adds that most stock market participants are not long term — most are very short-term and their time horizon is getting shorter.
Eating the Marshmallow
It comes naturally. Humans, by nature, are programmed to be short term for survival reasons. Nisbet demonstrates with an updated version of a 1960s Stanford University psychological experiment, now quite well known as the “marshmallow test.”
Small children were given the option to eat what was presented to them immediately or to wait for 10 minutes and get a second marshmallow.
“Sixty-six percent of the children eat the marshmallow, some of them immediately,” Nisbet says. The experiment had the scientists follow the test subjects for the next 30 years. The 35 percent that were patient had higher SAT scores, earned higher salaries at age 30, had longer marriages and had lower body fat percentages.
“This combination of our short-term environment and our human nature is a very, very powerful combination.” So how does this help with investing?
A long-term perspective provides a very different outlook on what’s happening in markets, Nisbet says, and by ignoring the news — even if just for a week after it happens — plan sponsors will have a better perspective on what’s occurred. Nisbet showed a 2,000-year graph of world GDP growth and contrasted the clear picture of a continuing exponential rise in GDP growth for the last 200 years with daily headlines of gloom.
The same principles go for selection of managers. Nisbet says a combination of managers who are taking a long-term view of the stocks plus plan sponsors that are taking a long-term view of their long-term managers results in far better returns.
But that isn’t easy, Nisbet says. Even though all the evidence suggests you should not look at performance over less than five years or you will fire the best managers (he refers to a study by Jack Bogle of Vanguard but other studies come to similar conclusions), we are tempted to make decisions on much shorter term numbers.
Nisbet left plan sponsors thinking about how to be more ruthless with fund managers about their short-term investment cultures, being involved in M&A, people changes, and not taking enough active risk. He advised plans to just be patient on investment performance.