The Long Run Is Just A Collection of Short Runs
Every great idea can be taken too far. Take the notion that investors should ignore the short run.
I argued on a radio show last week that venture capital, like all successful forms of investing, is a long-term game.
“That’s surprising,” the host said. “All we hear about venture capital from companies is how short-term oriented they are, focusing on this month and next month.”
“Those points aren’t mutually exclusive,” I said.
If a company only has enough cash in the bank to cover six months of operations, the short term is absolutely imperative. You have to watch monthly, weekly, even daily expenses like a hawk, questioning everything.
But value is ultimately created in the long run. That’s where scale takes off and compounding works its magic – over years and decades, not months and weeks.
The key is recognizing that the long run is just a collection of short runs, and capturing long-term growth means managing the short run effectively enough to ensure you can stick around for a long time.
Everyone has heard of the marshmallow test, the famous study where kids who had the willpower to forgo eating one marshmallow right away in exchange for two marshmallows 10 minutes later went on to do better in life. The study is interpreted as proof that those who look ahead make better decisions than those who focus on the short run.
But the most important part of the study is often overlooked.
The kids who held out for the second marshmallow didn’t just sit there patiently. Have you met a kid before? They can’t do that.
They were able to wait 10 minutes because they distracted themselves. They sang a song, or played with their shoes, or told the researchers a story. One kid hid under a desk. Another did jumping jacks.
The only reason they made it to the long run is because they effectively managed the short run, in this case by diverting their attention from something that was otherwise too tempting to resist.
And that, I think you’ll see, is the key to long-term thinking.
I hold a lot of my personal assets in cash – more than 25%, which few financial advisors would say is appropriate for someone with three decades in front of them before retirement.
People ask: Have I calculated how much long-term return I’m giving up by holding so much money in cash? I respond: Yes. But I’ve also calculated how much I’d lose if I were forced to sell stocks during a downturn for any reason, like covering bills in an emergency. That could be far costlier than the return I’m giving up on my cash. Earning a long-term return on my stocks means ensuring I can actually hold them for the long term. Which means I’m actually obsessed with the short run – not for its returns, but as a treacherous path to the long run that needs to be treated with respect.
Companies do this too. In his early days as CEO of Microsoft, Bill Gates said:
I came up with this incredibly conservative approach that I wanted to have enough money in the bank to pay a year’s worth of payroll even if we didn’t get any payments coming in. I’ve been almost true to that the whole time.
Microsoft could focus on the next 10 years not in spite of, but specifically because it managed its short-term finances so conservatively. A recession or a huge mistake wouldn’t be a fatal blow, and wouldn’t require selling strategic assets just to stay alive. Google, Facebook, Cisco, and Apple are similar. They hold hundreds of billions of dollars in cash that earns virtually no return. But by doing so they have the flexibility and endurance to earn much higher long-term returns on other assets, without the risk of having to firesell strategic assets in a pinch. The only reason the long term works is because the short term is so protected. There is a graveyard of investors and companies who were fully invested in the honorable name of long-term thinking but learned the hard way that their I’m-not-focused-on-the-short-run attitude has its costs.
Economist Tyler Cowen recently wrote:
Plenty of companies have made big mistakes from thinking too big and too long-term; for instance, a lot of mergers were based on notions of long-run synergies that never materialized. In reality, short-term improvements are often the best way to get to a good long-run plan.
Long-term thinking is often viewed as what’s left over when you ignore the short term. But it’s not. It’s what’s left over when you’ve nursed the short term so well that the rewards compound into something great – after a long time.