Long Term
We’ve written in the past about our preference for management teams that think and act long-term. We prefer business managers who are not afraid to make strategic, capital allocation, and hiring decisions that will impact their businesses five, ten, or twenty years into the future even if they are detrimental to short-term profitability. That sounds pretty good but how does one become long-term-oriented?
Long-term orientation is a mindset that takes a while to develop. According to Luca Dellanna, the author of Winning Long-Term Games, we often falsely believe that if we maximize the output of every day, we also optimize each year. Lying and cheating is an extreme example of short-term behavior, made particularly attractive when many around us engage in it for some attractive short-term benefit. There is roughly a 1% probability of getting caught in a lie right away. With time, the probability of getting caught rises sharply, and the strategy becomes unsustainable. A more benign example is rapid consumption of someone else’s trust, loyalty, or attention. Short-term thinkers try to aggressively upsell an existing client or “cash in” on a recent favor. The problem with this strategy is that there is a natural limit to rapid consumption beyond which one needs to focus on repairing relationships or reputation—often a futile undertaking.
Todd Combs, an investment manager at Berkshire Hathaway, eschews the concept of networking because it often involves some ulterior motive, a favor. He believes that by focusing on the process, i.e. becoming excellent at something, rather than an outcome—winning a job or a deal—is a much more effective strategy over the long term. The idea is not to eliminate sales pitches, favors, or risk-taking but to also engage in behaviors that make us valuable well into the future.
According to Dellanna, we should practice long-term behavior in our personal and professional lives. On a personal level, we should focus on seeking out and building high-quality, trust-based relationships. We should also build long-term skills that will yield benefits, financial and otherwise, years down the road. And we should accumulate assets to serve us during our lifetime and beyond.
When it comes to businesses, Dellanna recommends that managers make long-term investments into product quality rather than aggressive sales strategies. Think Steve Jobs’s maniacal focus on product design and functionality, for example, that took many years to play out and resulted in Apple becoming the world’s most valuable company. Costco’s laser focus on offering maximum value to its customers, often at the expense of short-term profitability, has also yielded a cult-like following.
Providing training to and upskilling employees is important because each business’s future is limited by the potential of its people. Businesses should also leverage the iterative nature of long-term behavior by frequently interacting with and learning from their customers. In turn, frequent interactions result in tighter feedback loops and uncover higher-quality reinvestment opportunities.