Saving Capitalism from Short-Termism: A Review of Alfred Rappaport's "Saving Capitalism from Short-Termism"

The financial crisis of 2007-2008 was a wake-up call for investors and policymakers alike. The widespread adoption of short-term strategies, driven by the expectation of easy returns and low risk, contributed significantly to the crisis. However, Alfred Rappaport's seminal work "Saving Capitalism from Short-Termism" offers a more nuanced perspective on the matter.

The Culprits of the Crisis

The book starts with an accounting of the culprits who caused the financial crisis. It is not just a matter of individual failures or market inefficiencies, but rather a complex interplay between factors such as market efficiency, benchmark tracking, and corporate governance. Market efficiency refers to the idea that markets should reflect all available information, whereas benchmark tracking can lead to a focus on short-term performance relative to a benchmark, rather than long-term results.

One of the key culprits mentioned in the book is the phenomenon of "herding" by the crowd. This occurs when investors follow the herd mentality, buying and selling based on emotions rather than rational analysis. The herding effect can lead to over-reliance on short-term performance indicators, which are often driven by technical analysis rather than fundamental value.

Benchmarks: A Double-Edged Sword

The book does not speak kindly of benchmark tracking, highlighting the limitations of using benchmarks as a proxy for investment performance. For instance, the author notes that review of "Saving Capitalism from Short-Termism" by Alfred Rappaport http://www.portfolioprobe.com/2011/11/14/review-of-saving-capitalis... 1 of 5 6/5/2013 4:20 PM suggests that benchmarks can be misleading, as they may not accurately reflect the underlying dynamics driving investment performance. Instead, the author advocates for a more nuanced approach to benchmarking, one that takes into account the specific characteristics of an asset class.

Investment Performance Measurement

The author proposes performance fees as an alternative to fees on assets under management. However, this solution raises several concerns, including the possibility of managers gaming the system by using performance fees to drive short-term gains rather than long-term value creation. The author suggests that longer measurement periods, such as 36-60 months, can moderate volatility and lengthen investment horizons.

Corporate Performance Measurement

The book critiques the practice of company-managed portfolios, arguing that it can lead to a focus on short-term performance at the expense of long-term value creation. The author advocates for a more integrated approach to corporate governance, one that involves greater oversight and accountability from both shareholders and management.

Word Count Target: Aim for 2100-2500 words

The target word count is challenging, but achievable with careful planning and execution. Each section should be substantial (300-400 words) and written in a clear, concise manner.

Practical Steps

Implementing the insights outlined in "Saving Capitalism from Short-Termism" requires a combination of education, discipline, and strategy. Investors can start by adopting a more nuanced approach to benchmarking, one that takes into account the specific characteristics of an asset class. They should also focus on long-term investment horizons, rather than short-term gains.

One practical step is to adopt a performance fee structure, as advocated by the author. This involves aligning compensation with shareholder value creation, rather than solely focusing on short-term returns. By doing so, investors can avoid the pitfalls of benchmark tracking and corporate governance failures.

Benchmarks: A Double-Edged Sword

The book highlights the limitations of using benchmarks as a proxy for investment performance. For instance, review of "Saving Capitalism from Short-Termism" by Alfred Rappaport http://www.portfolioprobe.com/2011/11/14/review-of-saving-capitalis... 2 of 5 6/5/2013 4:20 PM suggests that benchmarks can be misleading, as they may not accurately reflect the underlying dynamics driving investment performance. Instead, the author advocates for a more nuanced approach to benchmarking.

The Rewards of Company Managers

The book critiques the practice of company-managed portfolios, arguing that it can lead to a focus on short-term performance at the expense of long-term value creation. However, it also acknowledges that companies have a fiduciary duty to their shareholders and may be subject to shareholder pressure to prioritize short-term gains.

The Rewards of Stock Option Plans

The author discusses the concept of stock option plans (EPOP), which can provide incentives for company managers to focus on long-term value creation. However, this solution raises several concerns, including the possibility of executives gaming the system by using options to drive short-term gains rather than long-term value creation.

Conclusion

"Saving Capitalism from Short-Termism" offers a comprehensive analysis of the challenges facing investors and policymakers. By understanding the root causes of the financial crisis and implementing practical strategies for mitigating its effects, we can create a more sustainable and equitable financial system.