Wise investors should be playing the long game

Blinkered, myopic and short-termist. Constantly under pressure to deliver instant results. Guilty of a lack of long-term investment, and showing an unhealthy focus on squeezing out costs, and making a fast buck.

The financial markets are constantly accused of being only interested in what happens this week, or at best the week after, and of ignoring the need to build value over years and indeed decades.

In fairness, there may sometimes be an element of truth in this. Chief executives can be punished ruthlessly if they don’t deliver results very quickly, and shareholders demand action as soon as a single profit forecast is missed.

And yet, in the last year something very interesting has happened. Long-termism has made a defiant recovery. The companies that make big bets on the future have been rewarded with the best performance, and even some fund managers are now demanding an end to quarterly reporting.

The hedge funds, which more than anyone else championed a ‘deliver results by yesterday’ culture, are in decline. Taken as a whole, the financial markets are getting a lot better at encouraging investment over decades – and that can only be good for the economy.

Take a look at the shares that did best over 2015 and a very clear theme emerges. Making money right away is not of much interest to anyone.

Let’s start with the US S&P 500, because that is still the key global index.

The second best-performing company on the S&P 500 during 2015 was Amazon. Its share price more than doubled over those 12 months, rising from $300 to just under $700, and adding more than $150bn to its value in the process.

And yet Amazon is a business that seems more or less indifferent to profits, and concentrates entirely on building market share and creating new products. Amazon’s investment in R&D last year was a staggering $11bn, or three times the amount spent by the pharmaceuticals giant Bristol-Myers Squibb. Whatever it makes, it ploughs back into the company, creating staggeringly cheap products for consumers and opening up new markets for small companies in the process.

It is now pouring huge sums into television – the spend on its version of Top Gear will be an estimated £160m over three years – while its founder Jeff Bezos is trying to do something similar with the media business, through his acquisition of the Washington Post, and space, through his Blue Origin unit. There is no tycoon who thinks longer-term than Bezos – and the market loves him for that.

Or take the best-performing company, Netflix. Its shares rose from less than $50 to more than $110 during the last year, even if they were down a bit today. But it has been a long, hard grind to get the business to where it is now. It was founded all the way back in 1997, but struggled to make any real impact for years. It took two decades of investment, and massive spending on high-quality drama, to make it a global success. In the last couple of years it has broken through.

Netflix is expected to spend $5bn on creating original drama this year. That’s a lot more than the roughly $3.5bn the BBC spends on programming a year (and nobody ever got sent to jail for deciding they didn’t want to pay for Netflix). And yet the company makes tiny profits - $77m in the latest quarter, which is not much more than a rounding error. It ploughs its cash back into hiring the best directors, writers and actors it can afford. Does the market object to that? Not in the least – it loves that strategy, and is backing the shares.

You can go further down the list and see the same kind of forces at work. The American rankings of the best-performing shares are dominated by internet and biotech companies, the kind of businesses that invest in the future. The UK, unfortunately, has far fewer of the kind of technology companies that require long-term investment than the United States does. But there were signs of the same trend here, with the low-key Irish industrial group DCC topping the FTSE ranking for 2015, along with the builder Taylor Wimpey, and the online gambling company, Betfair, one of our few home-grown internet successes, topping the FTSE 250.

Over in Germany, Adidas was the best-performing stock on the DAX index, rising more than 50pc during the last year, as the massive investments it has made in sports sponsorship pays off for its brand. The best-performing stock in Europe overall last year was Fingerprint Cards, a small Swedish company that specialises in biometric technology. Its stock was up by more than 10-fold during 2015 as mobile phone companies became enthused by the potential for using fingerprints instead of hard-to-remember passwords. And yet the company had struggled for 15 years with very little interest in its technology – until the rest of the world finally caught up with it.

The fund managers that control the bulk of the market have started to notice that long-term investment matters a lot more than what happens this week or next. Legal & General boss Nigel Wilson yesterday argued in these pages that quarterly reporting should be scrapped, because it forces managers to think short term. At the same time, the hedge funds, which more than most institutions pushed for immediate results, are going out of business. In the first nine months of last year, 674 shut down, according to Hedge Fund Research. Several major funds retuned their cash to their investors. Managers won’t have to live in fear of their demands much longer.

It turns out that the financial markets are perfectly happy to back long-term investment, so long as it has the prospect of a genuine return. True, there is nothing wrong with some pressure for short-term performance. Without that, the people running companies can very quickly turn lazy and complacent. It is easy to say you are concentrating on the long term when all you are really doing is coasting. But there appears to have been a change, with investors more and more willing to back the business making big wagers on themselves.

What is driving that? Two things. One is a generally low-growth global economy. Meaningful returns are very hard to make right now, and there is not much mileage in short-term cost cutting or pushing up prices. The second is technology, and the disruption it creates. That is generating lots of opportunities for genuinely radical companies to create vast amounts of wealth, but only if they are willing to spend first to create the products, content and distributions systems needed to exploit that potential. As robotics, genetic engineering, and ever more sophisticated web apps all gather strength that will only increase.

In fact, what many of the people who complain about the short-termism of the City and Wall Street are unhappy about is a refusal to keep backing declining industries, or sink money into projects with little hope of a return. Anyone who closes a factory, or shifts a call centre offshore, is likely to be accused of short-termism. But there is nothing virtuous about spending money on businesses that are in trouble. The sooner an economy switches from declining to expanding industries, the better off everyone will be. In the past year, the markets have proved that, in the right circumstances, they are very good at driving that process.