FORSYTE
The risk of failure if you don't come first
JOHN HOWARTH
The last thing I want to engender is nostalgia for a romanticised past, but should we not be a little concerned by the increasing concentration on the short term in investment performance?
And not just in financial matters. In modern society you are either a winner or a loser, with second place now equated with something akin to failure. A new talent appears in literature, music, sport or any human endeavour and instead of simply enjoying it we ask: `Ah, but is he better than . . .?' Despite the efforts of Mr Eric Morley, life is not a beauty contest. I ask because not all companies, funds, or even the new hydra-headed financial conglomerates can be top of the most recent league table — yet that is what is increasingly being demanded of them by the inexorable concentration on the ratings that is now part of City life. When indices are moving nervously around their highs and Wall Street gives us a sharp reminder that even the United States can't run a massive balance of payments and budget deficit forever, it is fuel for this ultra- Competitive investment approach. Keen young salesmen of financial services, vir- tually none of whom was around in 1974/ 75, have to justify their salaries (or, to be more exact, their bonuses and commis- sions) by generating more dealings. The only way they can do that is to cry 'I gotta horse' more loudly than the next tipster. Like all fevers, this one can be catching. The danger is twofold. First of all, in a bid to keep the money rolling in, the tempta- tion increases to promote companies in which faith is a little less than 100 per cent. True, the conglomerates who are now beginning to take positions in shares, as well as offering investment advice to the public at large, are subdivided by the famous 'Chinese Walls', but how much of a crisis will it take to bring about the first crack? It is as well to know who is blowing the trumpet that one day might breach them. There never was a tip without a tap, but until now one usually knew who the tapper was.
Is it too fanciful to suppose that an integrated house long of stock and short of Principles (and you, the punter, will have no Way of knowing whether they're long or shell) might be just a little over-keen to recommend their stock should the going get rough? The second danger is more subtle and poses a much longer-term threat. Because being best is now virtually ail, it follows that second or third best is not good enough. There are many good companies that .we all know, and which employ thousands of deserving people, who can never aspire to the first rank. Comes the time for, say, a rights issue or a share placing in a particularly tight market and the response is unenthusiastic. Strains be- gin to appear which can have repercussions far outside financial markets.
Or, a company with a consistent record is written up by an over-zealous analyst caught up in the euphoria who says to himself 'Profits up another 15 per cent' almost as a matter of course. There are times, and today's minimal inflation period is, paradoxically, one of them, when the same again growth becomes harder, if not impossible, to achieve in certain trades. For example, these last few weeks of late June/early July are the time when we get a spate of results from leading food manufac- turers like A.B. Foods, Unigate, Northern Foods, Avana, and Fitch Lovell, all of whom have a spring year end. As food price inflation is held in check (as it is being at the moment), it becomes progressively more difficult for these companies, who need price increases from time to time, to keep repeating the growth pattern.
I have deliberately chosen these five examples because they are first of all topical, and they are also all responsible and careful about keeping their share- holders' assets in fine shape. But imagine other less financially strong — even less scrupulous — companies who find them- selves in a tight corner because of circum- stances not entirely of their own making and where expectations have been hyped up. Might they not, aware as they must be of the need to keep on performing to get their portion of finite cash resources and to keep their share price from falling, be tempted to cut back on investment, or stop advertising, or go in for too much off- balance-sheet financing just to keep P. & L. looking good? What implications does that have for the future of the company, for its employees, for dividends? It would be going too far to say that an excessive interest in the short term could threaten capitalism as we know it (though don't forget the secondary banking and property bubble that burst to cause the 1970s crisis, or more recent events in Singapore).
What is sure, however, is that the law of the new economics, and some of the vested interests pushing it, are merciless. Either you have to get richer or you get poorer. You might have attained a comfortable position but you cannot rest there. Two factors make it impossible — one, your competitor who might get ahead of you and put you out of the race, and, two, new machines and/or techniques coming along which are more expensive to replace than the old.
You must keep on acquiring more ex- pensive plant or eventually you will own none — and to acquire it you have to satisfy today's unhealthy pressure for in- stant success. Companies find themselves on an escalator that moves ever forward, yet upon which they must not 'stand on the right'. They have to work the mechanism that makes it move themselves, or be pushed off by others anxious to work it. In the words of Bette Davis as Margot Chan- ting: 'Fasten your seat belts; we're in for a bumpy ride!'
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