A shoutout to the future of the right capitalism
“Short term capitalism is about the art of the profitable. Long term capitalism is about the art of the possible. As interest rates approach zero, long term capitalism is the only capitalism that has value“. — Chamath Palihapitiya
There are many misunderstandings regarding capitalism. One of the most misleading is that capitalism is about profit maximization rather than intelligent and effective capital allocation.
Few have shown how to outperform the market by sacrificing immediate profitability and retaining the earnings to fund further growth and innovation. It is extremely surprising why so many people forget how the wealth of the most successful enterprises has been build through retained earnings:
“After all, it was no secret that mind-boggling wealth had earlier been amassed by such titans as Carnegie, Rockefeller and Ford, all of whom had retained a huge portion of their business earnings to fund growth and produce ever-greater profits. Throughout America, also, there had long been small-time capitalists who became rich following the same playbook.” — Warren Buffett
The emerging crisis caused by Covid-19 has already divided the business world into laggards and innovators.
The public market value of laggards like Ford, Delta, and GE has significantly declined. Their focus was on short-term profitability and protecting their market share. They also took massive debt through the issuance of bonds to fund share buybacks instead of increasing their investments into R&D. They struggle to adapt in these unprecedented times.
In contrast, innovators like Amazon and Tesla that have been criticized for years for the lack of profitability have significantly increased their public market value. Their focus was and still is long-term profitability and increasing their market share. For this, they spend their earnings and used secondary offerings to strengthen their balance sheets through investments in innovation and growth. During these unprecedented times, they have also shown that their businesses can better navigate through this ambiguous times and adapt to changing environments more effectively.
In summary: Short-term capitalism: Let’s borrow money to buy back shares to boost stock prices for short-term gains. Long-term capitalism: Let’s invest in innovation and disruptive technology paradigm shifts for long-term gains.
The success story of Amazon and Tesla has not been one overnight success but rather the continuous work of a dedicated team of visionaries over many decades that created a whole unique ecosystem that have never been before. Long-term capitalism is the only working form of capitalism.
We as a society should invest further into innovation and breakthroughs that move society forward. Those projects are consuming a lot of time and resources but are enormously rewarding in the end. Think of clean and abundant energy or interplanetary travel. As Sam Altman has stated in a world where everyone worries about instead gratification, these people will be hugely rewarded that are patient.
“One of the notable aspects of compound growth is that the furthest out years are the most important. In a world where almost no one takes a truly long-term view, the market richly rewards those who do.” — Sam Altman